Beware bargain pricing – Premium prices can shore up intent

Background

We were engaged by a professional services firm to help inform optimal pricing for their service offerings.
There was an internally held hypothesis, driven by anecdotal evidence, that the business was consistently pricing themselves out of RFPs and being rejected on the basis of being too expensive.

At the same time as conducting this research, the business wanted to take the opportunity to get a read on brand health and positioning.

Approach

Vibrant Insights designed a research methodology that engaged decision-makers in larger organisations.

Through this survey, we sought to unpack brand health, brand associations, and utilised a modified Gabor Granger technique to understand price elasticity. This approach was determined as best-fit, given individuals have less specific pricing knowledge due to the nature of the product (making Van Westendorp Price Sensitivity Meter approaches unreliable), and this was an intermediate step before more advanced choice modelling.

To expand on the pricing approach:

• Six different price points per product were determined
• These price points were built from the current in-market price, and carefully considered with even steps to allow interpolation of prices (e.g. if increasing at $10 increments, we could interpolate a $5 or $15 increase)
• Individuals were randomly assigned to a price-point from the middle four points (never starting at either end point), with a view to controlling price anchors / bias, and allowing the experiment to continue
• Where individuals indicated a willingness to purchase at the randomised starting point, price was increased until all price points were exhausted or a price ceiling was reached (i.e. they opted out of purchase)
• Where individuals were unwilling to purchase at the randomised starting point, price was reduced until all price points were exhausted or a price floor was reached (i.e. they opted in to purchase)
• Pricing was explored not just as a binary ‘yes / no’, but a nuanced 5-point scale to understand strength of purchase intent

The outcome

What surprised us most was the impact of higher and lower prices on strength of purchase intent.

The research revealed that at the lower end of pricing, rejection of the provider increased significantly. The reverse was also true – at the higher end, purchase intent and strength thereof increased significantly.

Further investigation revealed that the brand was seen as a premium, high-touch, high-quality provider. Reducing prices (particularly when anchored to a higher price), challenged this perception and resulted in rejection, raising questions of quality and reliability. This helped explain that RFQs where price was quickly reduced in early discussions were leading to losses.

Higher pricing reinforced the brand’s more premium, high-quality perceptions. While some dropped away as price increased, those that did remain found significant value at the higher, all-inclusive value.

This has given rise to further experimentation of pricing dynamics with real-world RFQs, helping the business use price as a heuristic to confer quality and comprehensiveness of offer, while ensuring higher revenue and profitability.

In particular, this research is interesting as it challenges the common logic of reducing prices to secure business – when this case study demonstrates reducing prices can lead to losses, and increasing price lead to more loyal customers.