Pricing Analysis: The Van Westendorp Price Sensitivity Meter
Finding the optimal price for a product or service is a major challenge for companies. How high is the maximum price allowed for someone to buy the product? And how cheap can it be so that consumers do not think it is inferior and fear low quality? Sometimes an initial pricing analysis is already part of a concept test.
Market research offers a number of methods to help companies determine the price of a product. One of them is the so-called Van Westendorp Price Sensitivity Meter (PSM).
Consumers answer four questions about their price expectations and their answers can be used to calculate price readiness and price sensitivity for goods. Here comes the Appinio guide to a pricing analysis with the help of the Van Westendorp Price Sensitivity Meter:
I. What is the Van Westendorp Price Sensitivity Meter?
A Van Westendorp pricing analysis is conducted to determine consumer price preferences. What is the maximum amount of money a consumer would pay for a particular product? And how much higher can the price be to still buy the product?
These questions can be answered with the Van Westendorp Price Sensitivity Meter. The Dutchman Peter van Westendorp developed the method in 1976. It is also simply known as the "price sensitivity meter" (PSM) and essentially consists of only four questions that can be included in a market research questionnaire.
To determine the limits of a price range, the target audience should answer four questions:
2) At what price would you describe the product as expensive but you would still buy it?
3) At what price would the product be too cheap for you to doubt its quality and not buy it?
4) At what price would the product be a bargain, i.e. a great buy for the money?
The evaluation of a Van Westendorp pricing analysis is very simple: The answers of the survey participants are simply plotted in a graph. The X-axis shows the prices, while the Y-axis shows the percentage of consumers who quoted the respective price, i.e. the cumulative frequency.
Before this, however, the values of two curves must be reversed. The curves with the values "cheap" and "expensive" are drawn with inverse values. Two curves are created which show how many consumers regard prices as "not cheap" and "not expensive".
This produces four different curves. The points at which these curves intersect represent the actual result of the Van Westendorp Price Sensitivity Meter. But how do you determine the price a product should have so that enough consumers buy it?
Determining the Price
In order to determine the price of a product, a particular intersection is important: The point at which the curves "too expensive" and "too cheap" intersect. This point is also called the "Optimal Price Point".
At this intersection point, exactly the same number of respondents consider the price to be too expensive or too cheap. The buying resistance is lowest here because very few people have said that they would not buy the product at this price because it is too cheap or too expensive.
The point at which the curves "not expensive" and "not cheap" intersect is called the "Indifference Point". At this point, exactly the same number of people find the price expensive or cheap. This is where the image of the price is most balanced.
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.
The upper price limit is at the intersection of the "not expensive" and "too expensive" curves. The point is also called the "Point of Marginal Expensiveness". If a product becomes more expensive than the price at the point of intersection, then the probability that consumers will accept the price and buy the product is very low. This results in lower sales figures and possibly a loss of image due to prices that are too expensive.
The lower price limit, on the other hand, is at the intersection of the curves "not favourable" and "too favourable". Here exactly the same number of respondents perceive the price either as a bargain, or they consider the product to be too cheap and fear poor quality.
It is the threshold of relative price worthiness ("Point of Marginal Cheapness"). A product should not become cheaper than this price. This would damage the product image or the brand image because the product comes across incredibly cheap.
The price range is between the upper and lower price limits. This range should include the price of a product or service that is accepted by consumers.
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IV. Pros and Cons
The Van Westendorp Price Sensitivity Meter is a suitable method of a pricing analysis for new products or services that are innovative and may not exist in this form. It is not easy to compare and determine prices with competing products.
The Van Westendorp pricing analysis gives a first indication of possible prices and offers a number of 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 sufficient to create the diagrams and determine intersections.
- The presentation of the results in the form of diagrams is also 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 characteristics of a product are not taken into account. Only the willingness to pay for a product is queried. The survey participants do not know about the product features. As consumer goods become more and more complex, this is a potential disadvantage because the characteristics of a product influence consumers' willingness to pay.
The Van Westendorp Price Sensitivity Meter gives a first impression of how much consumers are willing to pay and price sensitivity, and can be carried out in parallel with other price determination methods.
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