## Posts Tagged ‘Price Sensitivity’

### Pricing Demystified, Part II: The Van Westendorp Price Sensitivity Meter

March 12, 2009

Several different analytical approaches are available to help marketers determine the optimal price to charge for their product or service.  Here, I will discuss the Van Westendorp Price Sensitivity Meter, which is simple to employ, yet gives some very useful information.

Van Westendorp starts with a survey asking respondents just four simple questions about price:

1. At what price would you consider this product so expensive that you would not consider buying it? (Too expensive)
2. At what price would you consider the price of this product so low that you’d question its quality? (Too cheap)
3. At what price would you consider the product starting to get expensive – not out of the question, but you’d need to give some thought to buying it? (Expensive)
4. At what price would you consider the product to be a bargain – a great buy for the money? (Inexpensive).

Graph the Responses

Once you have compiled this information, group the answers to each question into frequency distributions and plot the cumulative frequencies on a graph.  Each question above will have its own line on the graph.  The percentage of respondents should comprise the vertical axis; the price points, the horizontal axis.  Since the lines need to intersect, invert the cumulative frequencies for the “Inexpensive” and “Too cheap” on the graph.

Determining the Acceptable Price Range

The price at which the “Too cheap” and “Expensive” lines intersect is described as the “Point of Marginal Cheapness,” or PMC.  PMC represents the lower limit of the acceptable price range.  Similarly, where the “Too expensive” and “Inexpensive” lines cross is the “Point of Marginal Expensiveness,” or PME.  This is the upper limit of the acceptable price range.

Determining the Indifference and Optimal Price Ranges

Next, the point where the “Inexpensive” line and the “Expensive” line cross marks the “Indifference Price Point,” or IPP, the point at which the same percentage of respondents think the product is either cheap or expensive.

Finally, the point at which the “Too cheap” and “Too expensive” lines intersect is known as the “Optimal Price Point,” or OPP.  It is at this point where the percentage of respondents who say the price is too cheap equals that who say it is too expensive.  OPP is optimal in the sense that the price senstivity to the product for being cheap is equal to that of being too expensive, and is often the recommended price.

Using the Results

1. The OPP is the recommended price for your product or service.
2. Competitive products will rarely be priced outside the acceptable range (between PMC and PME).
3. If your goal is a healthy balance of revenue and market share, price as closely to OPP as possible.
4. If your goal is to maximize market share or penetration, price somewhere between PMC and OPP.
5. If your goal is to maximize revenue, or “skim the cream,” price somewhere between OPP and PME.

Warnings

Finally, be aware of four limitations or dangers of Van Westendorp:

1. Your data is derived from surveys, so questions must be worded properly to avoid biased responses, and sample size must be large enough for statistical accuracy;
2. Different customer segments have different price sensitivities.  Hence, if you serve multiple customer segments, the OPP and acceptable range may be different for each;
3. Even if you price within the acceptable range, you can still price too low such that you lose money and/or get regarded as low quality; and
4. Even with a skim the cream strategy – pricing within the acceptable range –  you can price your product too high that your competition wins your customers.

All this said, continue to know your customers intimately and, using Van Westendorp’s points for a guide, experiment with different price points until you find the one that brings you the closest to achieving your marketing objective.