Let’s say you’ve got an exciting new product or service you’re ready to release to the world. How do you know how much to charge for it? The easy answer is to set your price based on how your product compares to similar products already on the market.
But what if that information isn’t useful—your product/service is so different that a comparison doesn’t work? In this post, we’ll discuss the Van Westendorp Price Sensitivity Meter (PSM), one oft-used method to research the appropriate pricing of a product or service.
Van Westendorp’s PSM method is a direct pricing method and assumes that people have some general understanding of what the product or service is worth. Due to the PSM’s direct nature, it is commonly used in surveys by asking four questions: 1) At what price would you begin to think product “x” or service “x” is too expensive to consider? 2) At what price would you begin to think product “x” or service “x” is too cheap that you would question the quality and not consider it? 3) At what price would you begin to think product “x” or service “x” is expensive, but you would still consider it? 4) At what price would you begin to think product “x” or service “x” is a bargain – a great buy for the money?
These questions must be asked in a way and at a point in the survey where answers are unaided. Further, the questions will ultimately need to be validated by eliminating inconsistent responses (e.g., responses must be deemed valid by checking if Too Cheap < Bargain < Expensive < Too Expensive). Once the data is cleaned, the PSM is created by plotting the inverse cumulative distributions for the Too Cheap and Expensive responses and the normal cumulative distributions for the Bargain and Too Expensive responses.
For ease of interpretation, the plots for the Bargain and Expensive response need to be labeled as Not a Bargain and Not Expensive (e.g., At $45, 31% think the product is not a bargain while at $115, 75% think the product is not a bargain).
There are four important intersects on the PSM: 1) Optimal Price Point (OPP) – intersection of Too Cheap and Too Expensive, 2) Indifference Price Point (IPP) – intersection of Not a Bargain and Not Expensive, 3) Point of Marginal Cheapness (PMC) – intersection of Not a Bargain and Too Cheap, and 4) Point of Marginal Expensiveness (PME) – intersection of Not Expensive and Too Expensive. It is important to note that even though the PSM provides an OPP, that when using the PSM you must consider the entire acceptable price range, which is the PMC to PME.
The Van Westendorp’s Price Sensitivity Meter is a data-driven method to help determine the pricing strategy for a product or service. Cicero has used the PSM to provide insights to clients with regard to their pricing strategies. By asking the four unaided questions, we have helped clients understand how their target markets value their products. In addition to the insights provided, Cicero has guided clients’ marketing strategies to improve perceptions of clients’ products’ value amongst their target markets.