Pricing New Digital Products During Uncertain Times

Pricing a new product is complex.  Pricing a new digital product offer during the COVID-19 outbreak is significantly harder.  

Discussions on your product pricing model should normally start long before you plan to enter the market.  An effective pricing strategy should be an integral part of your product development cycle.  But with an unplanned pandemic changing the demand landscape, how do you price your product to achieve the greatest value now?

Typically, companies would engage in research (i.e. surveys, interviews and focus groups) with their customers to help answer some of their near and long term pricing strategy questions. However, with the COVID-19 crisis causing upheaval to business environments, many companies are questioning the accessibility and reliability of customer research.

To help you think through your pricing strategy in the midst of the pandemic, in this article I will outline:

1. Challenges that may develop when conducting research to price a new digital product
2. Potential solutions to address and minimize these research challenges
3. Pertinent feedback from front-line respondent recruiters and market research companies currently doing market research during the COVID-19 crisis.

Unique Challenges of Innovative Products

About 80 to 90 percent of mispriced digital products are priced too low. This was the case for the first portable readers. The innovative product turned the publishing industry upside down, permanently disrupting supply chains, inventory management, and delivery infrastructures. As a result of the low price point, the company could not keep up with demand. But more importantly, the company greatly underestimated the value of portable readers and missed out on substantial profits. According to some estimates, their initial product pricing model destroyed $1 billion of potential profits for the publishing industry as a whole.

It is extremely difficult to accurately gauge the full spectrum of benefits of innovative products. Pricing objectives in the early stages of development should focus on closing these lapses of information, giving you an accurate market evaluation.

Figuring Out Your Value

 There is usually a wide gap in knowledge about the true value of revolutionary products before they enter the market. Closing this gap requires intensive research and investment. To assist clients with this perplexing problem we have developed our “Value Navigator”, a five-step process for estimating the value of new innovations and pricing them appropriately.

1. Carve out a Research Sample

Deciding whom to include in your research sample is an important first step. Unlike products launched into existing categories, the success of innovations usually depends on the first 3-5% of adopters. These early adopters not only put products through rigorous use but also stand to benefit from them the most. They have a stronger grasp on the technology and can ultimately influence the opinions of the entire market. Their views of value and price sensitivity for the product will have a greater impact than a truly random sample.

2. Prototyping and Clear Education

Educating customers is always an uphill battle. Sometimes education costs can get out of control, at which point it may be best to re-evaluate the entire pricing model. If the cost of education becomes astronomical then your product may need to be simplified or re-engineered. Whatever the case, it is imperative that your business provides the customer with an in-depth understanding of the product.

3. Determine Value Gaps

Through the interview process it’s essential to ask customers to identify and rate the individual attributes of your innovation. Once you have completed that exercise, ask them to rate their level of satisfaction with the products/services they currently use. This is often an interesting and enlightening exercise. 

New innovations often replace several different products at once. Understanding what those products are, their costs, and how customers use them is extremely important. These are ‘reference points’ that customers can use to assess the value of your innovation. 

The price of innovative products should reflect how much people value the problem you have solved. In other words, how much is bridging the value gap worth to potential clients?

4. Measure the Delivered Value

This is the trickiest part of the process. When clients make a buying decision, they purchase three things: size, speed, and certainty. Of the three, certainty is the most important. Therefore, you must measure all three from the customer’s perspective to ensure that you price your product properly.

5. Working with a Pricing Model

Developing your pricing model should be a process of elimination. Narrow down the price spectrum and cross out unfeasible ranges. This will help you better understand your market as a whole, along with any price sensitivities. Even though research is hypothetical and the real results may not exactly match your expectations, this approach will provide you with a close approximation of the best price points.

Challenges to Customer Research During the COVID-19 Crisis

Some challenges that could potentially impact customer research execution and outcomes during uncertain times include:

• Reductions in respondent response rates:  Less people may be willing to participate in research, which means that more time and effort is required to achieve a target sample size.
• Respondent bias: People’s behaviour may be influenced by current events, resulting in an overly pessimistic outlook of the future.

Implementing a Strategic Approach to Customer Research During Times of Crisis

Different types of pricing research achieve different goals and result in different insights. 

Jackie Lorch points out in her article Research Continuity in the Time of COVID-19, that “it is more vital than ever to keep in touch with [consumers] and not risk being left with a data ‘black hole’ as the world recovers.” With this advice in mind, I recommend the following best practices:

• Be transparent about how and why you’re collecting data
• Address concerns about privacy and security up-front.
• Be mindful of the respondent’s time.
• Set a positive tone by using an empathetic and engaging voice in all communications. Softer language is a good way to accomplish the right tone. 
• Strongly frame the context or mind-set you want the respondent to take. 
• Develop questions regarding the respondent’s future expectations for their own personal well-being and their community’s well-being. The data from this question can be used to segment respondents into pessimistic and optimistic groups. Then an analysis can be conducted to understand if there is a difference in responses to key questions.

An interesting note on respondents’ beliefs about the future:  The Pricing Solutions team conducted several surveys following the 2008 recession where we utilized future expectation questions. We found no significant difference in behaviour between pessimistic and optimistic respondents relative to the new product concepts or the price levels we were testing. Read our case study to learn more.

Insights Into the Impact of COVID-19 on Customer Research

We partner with different global fielding and respondent panel agencies that survey buyers in both B2C and B2B spaces. We have casually polled these market research partners, who agree that overall response rates have not significantly changed. 

Our team believes that customer research during the COVID-19 crisis can still produce reliable results when carefully implemented. With this in mind, we recommend our clients continue to explore consumer perceptions of value and willingness-to-pay.  

Hopefully, these recommendations on how to conduct customer research during a time of crisis will help you produce better pricing outcomes. 

Get Experienced Pricing Guidance

Looking for pricing guidance during this uncertain time? Give us a call. Our team is available to assist companies through the turmoil caused by the coronavirus pandemic.