When Apple released its first iPhone on June 29, 2007, the MSRP was set at $399. At the time, a research firm that conducted a "virtual tear down" analysis estimated the actual cost to manufacture the device was about $225. How in the world did Apple get away with a 75% mark-up in a time of ever smaller margins on consumer electronics devices? There are several reasons including a near revolutionary product, appeal to early adopters, a healthy economy, superior marketing and brand equity. But, above all, Apple understands how to communicate its value position through pricing. One could argue price positioning is even more complex in the services environment where intangible services like a new telecommunications or financial service or a hotel amenity are difficult to price given they do not have direct production costs.

One of the biggest questions companies must answer when developing a product or service, or revamping an existing one, is at what price to sell the device or service.  Many companies simply add a certain percentage to the cost of production, not taking into account what buyers will actually pay.  This works well and produces a profit for a successful product, but is it the smartest approach?  No.  In an economy where consumers are trying to save money and looking for value, if you set your price too low, you might actually turn customers away from your product by communicating low-quality.  To fully realize the pricing potential of a product or service, you must take into consideration the message you are sending the buyer with the price itself.  This is where the van Westendorp methodology can help.

Van Westendorp is excellent for price positioning.  It is based on the assumption that buyers judge quality (which can include functionality and effectiveness) by price, especially in an environment where decisions are complex.  For example, a classical demand curve shows demand continually rising as price drops, but the Dutch economist van Westendorp identified that in many situations, demand could actually fall if prices were too low because consumers would question the quality of the offering.  The method identifies prices to use if there is a desire to create a bargain product offering and/or a premium offering.  It also identifies when prices are so low that it creates doubt, or so high that buyers are excluded.

The method provides the following types of diagnostics:

1. The Point of Marginal Cheapness, or where the price is so cheap that resistance (from thinking the product is “too cheap”) outweighs the benefit of a bargain positioning
2. The Point of Marginal Expensiveness, or where the price is so expensive that any benefits of a premium brand positioning (e.g., superior technology, better brand name) are outweighed by the resistance of exceeding budget thresholds
3. The Point of Minimum Resistance from being too cheap or too expensive
4. The Indifference Point, or the going price for the product (by comparing this with the point of minimum resistance, it is possible to gauge “tension” in the market such as potential sticker shock)
5. Price thresholds – the analysis will identify certain price points where there is a major psychological shift in perceptions; for example, it might be found that at $600, there is a major jump in resistance, suggesting that if a price is set in this ballpark, it should be under this threshold (e.g., $599.99).

By understanding how to price your product or service to communicate a quality position, you can fully realize its sales potential.

Gina Woodall is Senior Vice President at Rockbridge Associates. Contact her at 703.757.5213 ext. 11 or gwoodall@rockresearch.com.