Van Westendorp Price Sensitivity Meter

 

Exhibit 16.5   Price Sensitivity Meter — example.

The Price Sensitivity Meter (PSM) is commonly used for new products where no clear benchmarks or equivalent competitors exist, such as a new gadget, like when the iPad was initially launched. While the PSM is not grounded in any theoretical foundation, it offers a useful framework for evaluating the price range for distinctive new products.

Respondents are shown the test item (a new product or service), and they are presented with contextual information and a price scale. The scale covers a wide range of price points from well below the likely minimum price point, to as much as three times the likely upper price.

Four questions are then posed to the respondents — at what price on this scale you would consider this product/service to be:

• A bargain? (Inexpensive)
• Priced so cheaply that you would question its quality? (Too cheap)
• Priced expensively? (Expensive)
• Priced so expensively that you would not buy it? (Too expensive)

An example of a PSM output is shown in Exhibit 16.5, where the cumulative responses to these questions have been plotted. The intersection points in the graph constitute price thresholds — optimum price, indifference price, and upper and lower limits of acceptable prices:

• The “Optimum” Price Point is the price at which the number of respondents who consider the product too cheap is equal to the number who consider it too expensive.
• The Indifference Price Point is the price where the number of respondents who regard the price as a bargain is equal to the respondents who regard the price as expensive. This generally represents the median price or the price of one of the leading brands.
•  According to Van Westendorp, the range of acceptable prices lies between the Point of Marginal Cheapness and the Point of Marginal Expensiveness. These intersection points are indicated in Exhibit 16.5.

Like Gabor–Granger, the PSM is quick and easy to administer. Its strength lies in that, unlike other established pricing techniques, PSM provides a continuous assessment of price sensitivity across a very wide range of prices. The range of acceptable prices sets boundaries that are useful for crafting pricing strategies and tactics, and for price positioning.

Because there is no prompting or competitive set, responses are based on respondents’ perceptions of competitive offerings and prices. This however assumes respondents know the market. Moreover, since PSM lacks any assessment of sales, for making pricing decisions, it is often combined with one of the direct approaches to pricing research.

PSM may be used for determining the acceptable price range, at the stage where a product is conceptualized. It is useful in new product development areas where there is no realistic (or feasible) alternative to provide direct comparisons, or markets where products may not face direct competition (e.g., new pharmaceutical products, new technology products). It may also be used for product offerings such as insurance, where direct competition may exist, but straight choices are not realistic.