Price sensitivity meter (PSM) is used for new products where no obvious benchmarks or competitor equivalents exist, for instance a new gadget, such as when the iPad was first introduced. And though it is not based on any theoretical foundation, the PSM provides a useful framework for assessing the price range for unique 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:
An example of a PSM output is shown in Exhibit 26.4, 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:
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 particularly 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 etc.). It may also be used for product offerings such as insurance, where direct competition may exist, but straight choices are not realistic.
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