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If you have access to target customers (hopefully you do), I'd recommend a short questionnaire using Van Westendorp's Price Sensitivity Meter [1]. I've had succ

by tazu 2y ago

If you have access to target customers (hopefully you do), I'd recommend a short questionnaire using Van Westendorp's Price Sensitivity Meter [1]. I've had success using it in the past, and you only have to ask four questions: 1. At what price would you consider the product too expensive? 2. At what price would you consider the product too cheap (low quality)? 3. At what price would you consider the product expensive enough to make you nervous? 4. At what price would you consider the product to be a bargain? You can then graph the results and pick the optimal price (for starting, at least). [1]: https://en.wikipedia.org/wiki/Van_Westendorp%27s_Price_Sensitivity_Meter https://en.wikipedia.org/wiki/Van_Westendorp%27s_Price_Sensi...

apwheele 2y ago
In https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2020.3602 https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2020.360..., assuming the demand curve slopes downward, a quite reasonable guess as to the optimal point on the demand curve is ([Max willing to pay] - [marginal cost])/2. So if doing the market research here in this post, #1 in your above list is the main thing. You want to find the reasonable upper bound before the demand goes to 0 on the price curve. For one time sales, like in this scenario, it is a fairly simple way to price things.
- jaggirs 2y ago
  Why does it subtract the marginal cost? According to the formula the more it costs to make the product (per customer/sale cost) the cheaper you should sell it.
  - littlestymaar 2y ago
    I assumed they meant “+” (and that's indeed what's in the paper) which is “split the difference between max customer price and marginal cost”, but that doesn't seem particularly insightful nor worth writing a “research paper” for that… (I'm always baffled how low the bar is for submission in econ journals). B basically any economic reasoning around “demand curve” and “marginal cost” is meaningless in real world situations.
    - apwheele 2y ago
      Yes it should be a "+", thank you. Just because marginal cost for software can be close to zero in some circumstances does not make demand curves meaningless!
      - littlestymaar 2y ago
        Demand curve is meaningless because humans don't have a stable and rational assessment of the price they would accept to pay for something (that's why having pretty hostess and expensive packaging are a thing) and this price also depends on many contextual factors: you're OK to pay much for for a glass of Coke in a fancy restaurant that you would accept at Mc Donalds, and a business values a piece of B2B software very differently depending on at which point we are in the fiscal year. The so-called demand curve is as useful for a business as a population-wide heartbeat distribution would be. It makes no sense to talk about “the” curve, since it changes all the time!
- wnc3141 2y ago
  doesn't that slope imply monopolistic markets?
- littlestymaar 2y ago
  Marginal costs makes no sense for software… Neither does it in most aspects of modern economies BTW, as it's zero or very small almost everywhere on the supply curve except in local places when the business is at capacity, and then the marginal cost is ridiculously high locally before returning to zero. Economics are really the only domain where someone (here Maurice Allais) can receive the “nobel price” and then see his results completely ignored later on, it will never cease to amaze me.
  - PeterisP 2y ago
    There is quite a lot of software (mostly in B2B market) that has a very high marginal cost, where the cost of doing sales and customer-specific customization can easily dominate the fixed cost of making the pre-sale software.
    - littlestymaar 2y ago
      - what you're talking about here isn't software, it's consulting service and (at least in all companies I worked with) this is usually billed separately from the software license itself (Edit: now that I'm thinking about it, in fact this is even mandatory in my country because of accounting rules: you can do amortization of software cost but not of service cost so you have to bill them separately, and I'd be surprise if such rule was unique to my country actually given that many countries have rules about amortization of software investments) - if you end up with a recurring license afterwards (which is what were're talking about here because SaaS works this way) then it's not even marginal cost, it's a fixed up front cost and then you have a stream of revenue. You know it's fixed costs because you don't have to pay it again when you're billing the customer for the second year. Same if your license includes a per-seat/per-CPU price. And the problem with the idea of “marginal cost” is that in practice almost every cost is a fixed cost. For instance, let say you have two guys that are dedicated to the customization of your product per client. You call this customization “marginal cost” but in reality it's fixed cost, as their salary is due whether or not you have a customer's product to customize this week. And I'm not being original here, as I said it's straight from the work of 1988 econ Nobel prize Maurice Allais.
garrickvanburen 2y ago
This is my preferred method of understanding price sensitivity, and I use it frequently in my work helping clients find the right price. Be advised, a prerequisite is having trusted camaraderie with the prospective customer. By which I mean, dont open with these questions…. You nay need to wait for the second conversation to ask them, having used the first conversation to build the trust. Happy to discuss further
mym1990 2y ago
Instead of "nervous", I would lean towards hesitant. The actual question is: "At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it?"
jbs789 2y ago
Noticeably, this is geared around the customer (rather than your costs)! This is the right way around. Then if the price doesn’t cover your cost, you don’t have a business.
TZubiri 2y ago
Interesting, a questionnaire with 4 questions might be a naive methodology. I would design the experiments so that one customer only answers one type of question, and they wouldn't even know they are being part of the experiment. For example: yesterday I bought a coffee, and the price seemed too high, I asked the cashier if they were sure, that the price wasn't right, and that I would like to cancel the purchase. It turns out she had wrongly understood I wanted 2 coffees, but if this is an experiment you can replicate, and train staff to do this once or twice per day, you've got a distributed and blind trial that doesn't rely on predicitons of subjects of their own perceptions.
- beng-nl 2y ago
  Many years ago, Fog Creek Software (actually Joel Spolsky) published a blog showing results of a similar experiment: price vs demand, where price of a certain population fluctuated naturally due to exchange rate fluctuations. There are more posts on price sensitivity in their archive. https://www.joelonsoftware.com/2007/04/24/deriving-your-demand-curve-using-exchange-rate-fluctuations/ https://www.joelonsoftware.com/2007/04/24/deriving-your-dema...
bemmu 2y ago
OpenAI used this when they launched ChatGPT. I recall answering these questions.

by tazu 2y ago

apwheele 2y ago

In https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2020.3602 https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2020.360..., assuming the demand curve slopes downward, a quite reasonable guess as to the optimal point on the demand curve is ([Max willing to pay] - [marginal cost])/2. So if doing the market research here in this post, #1 in your above list is the main thing. You want to find the reasonable upper bound before the demand goes to 0 on the price curve. For one time sales, like in this scenario, it is a fairly simple way to price things.

jaggirs 2y ago
Why does it subtract the marginal cost? According to the formula the more it costs to make the product (per customer/sale cost) the cheaper you should sell it.
- littlestymaar 2y ago
  I assumed they meant “+” (and that's indeed what's in the paper) which is “split the difference between max customer price and marginal cost”, but that doesn't seem particularly insightful nor worth writing a “research paper” for that… (I'm always baffled how low the bar is for submission in econ journals). B basically any economic reasoning around “demand curve” and “marginal cost” is meaningless in real world situations.
  - apwheele 2y ago
    Yes it should be a "+", thank you. Just because marginal cost for software can be close to zero in some circumstances does not make demand curves meaningless!
    - littlestymaar 2y ago
      Demand curve is meaningless because humans don't have a stable and rational assessment of the price they would accept to pay for something (that's why having pretty hostess and expensive packaging are a thing) and this price also depends on many contextual factors: you're OK to pay much for for a glass of Coke in a fancy restaurant that you would accept at Mc Donalds, and a business values a piece of B2B software very differently depending on at which point we are in the fiscal year. The so-called demand curve is as useful for a business as a population-wide heartbeat distribution would be. It makes no sense to talk about “the” curve, since it changes all the time!
wnc3141 2y ago
doesn't that slope imply monopolistic markets?
littlestymaar 2y ago
Marginal costs makes no sense for software… Neither does it in most aspects of modern economies BTW, as it's zero or very small almost everywhere on the supply curve except in local places when the business is at capacity, and then the marginal cost is ridiculously high locally before returning to zero. Economics are really the only domain where someone (here Maurice Allais) can receive the “nobel price” and then see his results completely ignored later on, it will never cease to amaze me.
- PeterisP 2y ago
  There is quite a lot of software (mostly in B2B market) that has a very high marginal cost, where the cost of doing sales and customer-specific customization can easily dominate the fixed cost of making the pre-sale software.
  - littlestymaar 2y ago
    - what you're talking about here isn't software, it's consulting service and (at least in all companies I worked with) this is usually billed separately from the software license itself (Edit: now that I'm thinking about it, in fact this is even mandatory in my country because of accounting rules: you can do amortization of software cost but not of service cost so you have to bill them separately, and I'd be surprise if such rule was unique to my country actually given that many countries have rules about amortization of software investments) - if you end up with a recurring license afterwards (which is what were're talking about here because SaaS works this way) then it's not even marginal cost, it's a fixed up front cost and then you have a stream of revenue. You know it's fixed costs because you don't have to pay it again when you're billing the customer for the second year. Same if your license includes a per-seat/per-CPU price. And the problem with the idea of “marginal cost” is that in practice almost every cost is a fixed cost. For instance, let say you have two guys that are dedicated to the customization of your product per client. You call this customization “marginal cost” but in reality it's fixed cost, as their salary is due whether or not you have a customer's product to customize this week. And I'm not being original here, as I said it's straight from the work of 1988 econ Nobel prize Maurice Allais.

garrickvanburen 2y ago

This is my preferred method of understanding price sensitivity, and I use it frequently in my work helping clients find the right price. Be advised, a prerequisite is having trusted camaraderie with the prospective customer. By which I mean, dont open with these questions…. You nay need to wait for the second conversation to ask them, having used the first conversation to build the trust. Happy to discuss further

mym1990 2y ago

Instead of "nervous", I would lean towards hesitant. The actual question is: "At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it?"

jbs789 2y ago

Noticeably, this is geared around the customer (rather than your costs)! This is the right way around. Then if the price doesn’t cover your cost, you don’t have a business.

TZubiri 2y ago

Interesting, a questionnaire with 4 questions might be a naive methodology. I would design the experiments so that one customer only answers one type of question, and they wouldn't even know they are being part of the experiment. For example: yesterday I bought a coffee, and the price seemed too high, I asked the cashier if they were sure, that the price wasn't right, and that I would like to cancel the purchase. It turns out she had wrongly understood I wanted 2 coffees, but if this is an experiment you can replicate, and train staff to do this once or twice per day, you've got a distributed and blind trial that doesn't rely on predicitons of subjects of their own perceptions.

beng-nl 2y ago
Many years ago, Fog Creek Software (actually Joel Spolsky) published a blog showing results of a similar experiment: price vs demand, where price of a certain population fluctuated naturally due to exchange rate fluctuations. There are more posts on price sensitivity in their archive. https://www.joelonsoftware.com/2007/04/24/deriving-your-demand-curve-using-exchange-rate-fluctuations/ https://www.joelonsoftware.com/2007/04/24/deriving-your-dema...

bemmu 2y ago

OpenAI used this when they launched ChatGPT. I recall answering these questions.