The classic "What would you be willing to pay for…" question used in market research is simple, but can produce unnaturally low price points as respondents tend to give only the lowest price at which they would consider buying a product.
In the real world, price is a signal of quality, and there are, in fact, prices that are too low to be acceptable: would you buy a steak dinner if it cost $3 or a new car if it cost $5,000?
What is the Van Westendorp Price Sensitivity Meter (PSM)?
This is a technique for gauging consumers’ price expectations for a finished product, often an existing product in an established category. Most importantly, the PSM enables the marketer to see a range of prices that might be appropriate, and to see the decline in consumer interest that occurs as price rises. Analysis of PSM data allows us to identify the pricing range that is acceptable to the majority of the respondents, allowing you to price your product to target the largest potential market.
How we incorporate Van Westendorp price sensitivity meter into a survey:
Before asking the PSM questions, we show respondents a description of the product/service. Note: It is essential to include a scale of prices to ensure respondents have a reasonable perception of the pricing landscape.
We ask the following four questions to establish the thresholds for the four different pricing curves we will develop:
Q1. What price do you feel is so low that you would have doubts about the quality of Newproduct? (feeds "too cheap" pricing curve)
Q2. At what price would you consider Newproduct to be a bargain? (feeds "bargain" pricing curve)
Q3. At what price would you consider Newproduct to be getting expensive but you would still consider using it? (feeds "expensive" pricing curve)
Q4. What price is so expensive that you would not consider buying Newproduct? (feeds "too expensive" pricing curve)
How we analyze Van Westendorp PSM pricing curves:
At the conclusion of the survey, we graph each of the pricing curves and determine the points at which the curves intersect. These intersections determine the optimal pricing ranges as detailed below:
Range of Competitive Prices: This range represents the prices at which the product can remain viable. It is determined at the low end by the intersection of the "too cheap" and "expensive" curves, and at the high end by the intersection of the "bargain" and "too expensive" curves.
At the low end of this range, the reference product will have greater usage and a lower profit margin
At the high end of this range, the reference product will have a lower usage and a higher profit margin
Optimal Price Point: This is the price at which an equal number of respondents consider the product to be too cheap vs. too expensive, and is determined by where the "too cheap" and "too expensive" curves intersect.
The optimal price point is based on product perceptions from the product profile presented, and does not take into account the marketing strategy (for e.g. product positioning) or brand value of the probe. Furthermore, if perceived disadvantages (such as lack of reimbursement) can be addressed, the probe could be priced at an incrementally higher value
Indifference Price Point: is the price at which an equal number of respondents consider the product to be a bargain vs. expensive. To find this use the intersection of the "bargain" and "expensive" line.