Pricing 360°: The influence of product features on pricing decisions

How can businesses achieve unparalleled growth and maximise profitability in today's competitive landscape? At boobook, we believe the answer lies in our data-powered strategic consulting, anchored firmly on four interconnected pillars: brand, product, pricing, and customer. We guide businesses toward excellence and sustainable growth by understanding and leveraging these fundamental elements.  

Determining the right price for a product can be daunting for many businesses. Often, pricing decisions are based solely on cost or intuition. However, at boobook, we know how important an informed, customer-first pricing strategy is to achieving business success. That's why we created the "Pricing 360°" series to guide you through the complexity of pricing strategy, one aspect at a time.

‍

In our previous article, we discussed the connection between brand and pricing. Today, we'll continue the "Pricing 360°" series with a second business pillar: the Product.  

‍
In this article, we will explore the relationship between pricing strategy and product features. We'll delve into the importance of understanding which product features are most valued by customers when setting your price. Adopting a data-driven approach allows you to develop optimal product configurations and corresponding pricing strategies that resonate with your target audience.

The influence of product features on pricing decisions

Setting the right price involves considering various factors, including external influences like macroeconomics, market demand, brand perception, competition, etc., as well as internal pressures such as production costs, company strategy, or corporate finances. While we will cover some of these factors in upcoming articles, for now it's absolutely crucial to acknowledge the pivotal role played by the range and the level of the offered product features in pricing decisions.  

Product characteristics such as design, durability, specific functionalities, product bundling possibility or other technical specs are vital elements to have evaluated by your prospects when determining the value customers assign to a specific product and what they are willing to pay for it, based on its specific product features combination.

It’s essential to avoid letting internal pressures dictate the product features or the price at which they are to be sold and instead focus on understanding and meeting your customers' real preferences, expectations, and willingness to pay. After all, what makes a product excellent is defined by the customer, not the product manager. This is the essence of a Value Based Pricing strategy, in which we strongly believe.

Get your pricing basics right first

Successfully defining an acceptable broad price range for your product(s) involves multiple factors, categorised as internal and external:  

Internal factors:  

1. Production costs: Understanding the costs involved in producing the product is essential for defining an appropriate price range that ensures profitability.  

2. Financial resources: A company's financial capabilities indirectly determine its pricing strategy. E.g. the level of promotional efforts at launch, the level of investments in product development that come with an impact on its final price, etc.

3. Positioning strategy: How the product is currently positioned in the market and its perceived value influence pricing decisions. A premium positioning strategy may warrant higher prices, while a value-for-money oriented positioning may require more competitive pricing.  

4. Pricing strategy: The chosen pricing strategy directly affects the product's final price.  
   Different methods, such as cost-based or value-based pricing, have distinct implications for profitability and market positioning.  

External factors affecting pricing decisions include e.g. the state of the (national) economy, market demand, level of competition or even seasonal influences.  

How to measure product needs  

Even though it’s important to have these internal and external aspects in mind, the key question you have to ask is what product or service features contribute the most to its value, and therefore, drive willingness to pay?  
Is it its design? Or maybe the width of the colour range you can choose from? Or could it be one of the more technical (and often underestimated) specs that really drives interest and willingness to pay? It is essential to be open to learning and understanding. These important nuances of what the customer thinks are crucial to a product and bring value and what are superfluous extras that they aren’t willing to pay more for.  
To further enhance your understanding of product-related customer insights, at boobook we use advanced methodologies such as conjoint analysis, Max Diff, or key driver analysis.  

Conjoint analysis is particularly useful for understanding the value of each individual product feature.  
In conjoint analysis, customers are shown all possible variations of product features/specs (levels) and are asked to choose which variation of features and specs-level they would be most likely to purchase, given a specific competitive and pricing situation.  
The different product variations, including competition (!), are presented on a simulated shelf to create a realistic shopping experience and the exercise must be done several times to ensure all possible competitive and pricing situations are tested. This is the only way to make robust, statistically significant, data-based insights afterwards.

Let’s take a look at the example with smartphone comparison. A product is characterised by its attributes and levels, which depend on the variations to be tested. A minimum of two attributes are required (for instance, price and brand) to create a design grid.

At boobook, we employ a scenario simulator for conducting key conjoint analysis. The simulator allows us to analyse the following:

• Price sensitivity of different product variations in a competitive market

• Estimates of volume, revenue and profit

• Evaluation of the value of various product features

• Potential cannibalisation effects

• Identification of the ideal product range

By analysing the data obtained, we can accurately measure the value of each product characteristic and identify which product variations customers are willing to pay more for. Combining these data-driven insights with our industry expertise, we enable businesses to make informed, strategic decisions that drive growth and profitability.

In conclusion

Conjoint method is a powerful tool that can address various business enquiries beyond pricing alone. Additionally, it can offer multiple simulation options.

However, it requires substantial set-up time, larger samples and is generally more costly compared to simpler methods. Conjoint analysis is best suited for examining the price sensitivity of multiple products, analysing the combined impact of price and product composition, and optimising price and promotional strategies.  

Curious to learn more? Check out our case study with Center Parcs to discover how we helped them identify which product features customers are willing to pay more for.  

Feel free to contact our team if you have any questions or want to learn more about data-driven strategic pricing. Stay tuned for our next article in the series: "Pricing 360°: Customer understanding as key ingredient of meaningful commercial strategies".

‍