Pricing Analysis: The Van Westendorp Price Sensitivity Meter
Setting the right price for a product or service can be a daunting task for companies.
It involves striking a delicate balance between setting the maximum price a customer is willing to pay, while ensuring the product's perceived value is not compromised by setting the price too low.
In some cases, an initial pricing analysis is carried out during the concept testing phase.
Fortunately, there are several market research techniques that companies can use to determine the optimal price for their products.
One technique is the Van Westendorp Price Sensitivity Meter (PSM), which involves asking customers four key questions to gauge their price expectations and sensitivity.
In this article, we'll guide you through the pricing analysis process using the Van Westendorp PSM and offer some useful insights.
What is the Van Westendorp Price Sensitivity Meter?
The Van Westendorp Price Sensitivity Meter is a method used to assess consumer price preferences by determining the maximum amount a consumer is willing to pay for a particular product, and how much higher the price can go before the consumer chooses not to purchase the product.
This approach, developed by Dutch researcher Peter van Westendorp in 1976, is commonly referred to as the "price sensitivity meter" (PSM).
The PSM involves just four questions that can be incorporated into a market research questionnaire.
Van Westendorp Pricing Questions
To determine the limits of a price range, the target audience is asked to answer four questions:
- At what price would the product or service be too expensive so that you would not consider buying it?
- At what price would you describe the product as expensive but you would still buy it?
- At what price would the product be too cheap for you to doubt its quality and not buy it?
- At what price would the product be a bargain, i.e. a great buy for the money?
Van Westendorp Analysis
The results of a Van Westendorp pricing analysis are easy to interpret.
The survey responses are plotted in a graph, with the price range on the X-axis and the percentage of consumers willing to pay that price on the Y-axis.
Two curves, representing the percentage of consumers who perceive the price as either "cheap" or "expensive," must be reversed before plotting.
This results in four curves, and the intersection of these curves reveals the optimal price range for the product.
However, determining the specific price point within this range that will result in sufficient consumer purchases requires additional analysis.
Determining the Price
To determine the ideal price for a product, the intersection of two curves is crucial: the "too expensive" and "too cheap" curves.
This intersection is referred to as the "Optimal Price Point," where an equal number of respondents consider the price to be either too expensive or too cheap.
This point indicates the lowest buying resistance, as very few people would decline to buy the product at this price due to it being too expensive or too cheap.
On the other hand, the "not expensive" and "not cheap" curves' intersection is known as the "Indifference Point". At this point, an equal number of individuals find the price either cheap or expensive, indicating the most balanced perception of the price.
Determining the Price Range
In addition, the Van Westendorp Price Sensitivity Meter can also be used to determine the acceptable price range for a product.
In addition to determining the optimal price point, the Van Westendorp Price Sensitivity Meter can establish a price range for a product or service.
The highest price limit is at the intersection of the "not expensive" and "too expensive" curves, also known as the "Point of Marginal Expensiveness". A product that exceeds this price limit is unlikely to be accepted by consumers, resulting in lower sales and potential damage to the product or brand image due to excessive pricing.
Conversely, the lowest price limit is at the intersection of the "not favourable" and "too favourable" curves. At this point, the same number of respondents consider the product either a bargain or of poor quality due to its low price, known as the "Point of Marginal Cheapness".
A product that falls below this price limit may be perceived as inferior quality and harm the product or brand image.
The price range for a product or service is between the upper and lower price limits, which should encompass a price point that consumers are willing to pay.
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Van Westendorp Pros and Cons
The Van Westendorp Price Sensitivity Meter is particularly suitable for conducting pricing analysis for new products or services that are not on the market yet.
The Van Westendorp pricing analysis provides a first indication of possible prices and offers several advantages:
- The process is simple. Survey participants only have to answer four short questions about their price expectations.
- The evaluation is just as simple. An Excel spreadsheet with the answers of the consumers is all you need to create the diagrams and determine intersections.
- The plotted charts are simple and easy to understand, making it easier to communicate the results of a market research study.
Despite all the advantages, the Van Westendorp pricing analysis also has a disadvantage:
The method solely relies on determining the willingness of customers to pay for a product, disregarding any specific characteristics of the product.
Consequently, survey participants are unaware of some of the product features when they provide their responses. This can be a drawback as product features may significantly impact customers' price sensitivity.
As consumer goods become increasingly complex, the omission of some product characteristics could affect the validity of the results.
Despite this, the Van Westendorp Price Sensitivity Meter still provides valuable insights into consumers' price sensitivity and can be used in conjunction with other pricing methods to determine optimal pricing.
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