Van Westendorp pricing (Price Sensitivity Meter)
Estimate the psychologically acceptable range of prices for a product/service
Let’s say Boat starts selling its wireless headphone at $720 ( ~₹60K), would you buy it ?
— I doubt, one might at this point of time.…
Hypothetically, what if Bose sells at same price point ?
— Most likely, people might … a little hesitant, but still….
How do you know if your customers want to pin their money that’s priced at $720 ?These pricing numbers can have emotional meanings associated with them. Could be
Way too cheap — Just take ma money !
Cheap — Bang for the buck
Hmm, getting expensive — Ahh .. ain’t bad deal ?
Too expensive — Outta ma league
Customers are price sensitive ! Somehow instincts is wired to flash the image of brand first, and then …. the price that comes with it.
How do you know the perceived value for product/service that customers are willing is fair price to pay for ? — PSM it is.
PSM (Price Sensitivity Meter) : probably one of the finest marketing technique for determining consumer price preferences; essentially helps determine psychologically acceptable range of price that customers are willing to pay !
When to use it ?
Assess what price range the market considers to be fair for your product
Need quick and quantitive results
How do i model this Price Meter ..thing ?
Pace 1: Build the questionnaire
Van Westendorp’s Price Sensitivity Meter is one of a number of direct techniques to research pricing. Direct techniques assume that people have some understanding of what a product or service is worth, and therefore that it makes sense to ask explicitly about price.
The 3 direct pricing research methods are these
(Less → Highly recommended in order)
Laddering - “Would you buy at $720 ?”, then ”would you buy at $950?” or ”would you still buy at $720 ?”
This approach brings scepticism, these questions are often sensed as negotiations strategy than pinning the price customers wants to pay
Direct open-ended questioning - “How much would you pay for this ?”
Bad way to ask, might not help on why X amount was said , puts on ambiguity if looked at quantity way. Might help with if further interviews at done to understand the perceived value seen by customers on why X value was assigned
Monadic - “Would you be willing to buy at $720 ?”
This strategy lets you pull exact data points from multiple customers, helping you aggregative leaning curve , problem is customer may not perceive this worth $720; hence a pre-survey would be helpful to narrow down range of prices customers wants to pay to. Would be nice to have a open-ended question with an option to comment to check if above pricing is a blunder
Basic example — AI noise cancellation Headphone (Hypothetical) :
Survey form : SuperSonic - AX200
Pace 2: Aggregate the data
The collected data from survey form would look like:
Respondents data is valid ONLY If :
Too cheap <= Cheap <= Getting Expensive <= Too Expensive
In-valid data means customers have not understood the questionnaire or have limited knowledge on the product space to assign the appropriate value. I think it would be safe to say to scrap off in-valid data off while calculating, possibly surveyor was “as drunk as a skunk” while acknowledging survey
Pace 3: Making sense out of Van Westendorp graph
Once you’ve collected data as part of pace 2, i recommend using any of these 2 tools, to spawn the graph, ‘how-to” is explained with great details in the links
Conjointly (needs-signup)
A sample graph would look like :
X-axis: shows all monetary values | Y-axis: shows the percentage of respondents
PMC - Point of Marginal Cheapness
The left-most intersection (Too cheap and Expensive) is the lower bound of the acceptable price range
PME - Point of Marginal Expensiveness
The right-most the intersection (Cheap and Too expensive) defines the upper bound of the range
Optimum price - The bottom intersection of Too cheap and Too expensive defines as % of respondents think price as either Too expensive or Too cheap
Graph Evaluation
~25% respondents perceive $420 is too cheap
Post $410, respondents think, its getting expensive
~52% respondents perceive its still cheap at $453.40
At $520.52 , ~50% respondents thinks its expensive, ~18% respondents think its cheap
Conclusion
PMC ≤ Acceptable Price range ≤ PME
The Acceptable Price range price ranges from $453.40 - $520.52
One may argue to pin “Optimum price” should be price one should sell for i.e $487.57; yet little risky to bring perfection into real world; though this maybe a subjective call.
Pace 4: Additional Analysis (optional, yet nice to have…)
The analysis only identifies the price range customers are willing to pay, but not whether they will pay.
At a price between the price you identified as ‘a cheap’ and the price you said was ‘getting expensive’, how likely would you be to purchase?
Very unlikely
Unlikely
Unsure
Likely
Very Likely
With this question, assigning an arbitrary value for varying options, one could collect results and take an informed call on how likelihood expected percentage of purchase is going to be…