- A little background
- What is the Van Westendorp Price Sensitivity Meter?
- Example Van Westendorp chart analysis
- Why you should use the price sensitivity meter
- How to run your own Van Westendorp pricing analysis
- Download the Van Westendorp Pricing Analysis Excel Template:
- Considerations for the Van Westendorp Pricing Analysis
A little background
Finding the optimal price point for a product or service is absolutely critical to maximizing potential revenue and increasing your market share.
Unfortunately, most companies don’t really spend a lot of time testing and figuring out what the sweet spot of their pricing strategy is. In fact, on average companies only spend 5 hours figuring out their price points.
Scary considering that — out of everything we can do, pricing has the biggest impact on revenue.
This post will first talk about how you can utilize the Van Westendorp Price Sensitivity Meter to set your prices effectively and maximize your revenue.
After this, I’ll walk you through how to run your own Van Westendorp Price Sensitivity meter and even provide a sample Excel sheet that you can plug in your information to.
Lastly, I’ll give some of my opinions on effective modern-day implementations of the Westendorp analysis based on my own experience with running these analyses.
What is the Van Westendorp Price Sensitivity Meter?
The van Westendorp Pricing Model (also known as the Price Sensitivity Meter [PSM]) is a method for gauging consumers’ perceptions of the value of a service or product.
It was created by Dutch economist Peter Van Westendorp in 1976
The model works by surveying customers and asking them a list of four questions to gauge their interest in your service or product.
Once the cumulative frequency distributions for these questions are graphed — they will produce a range of prices the market considers acceptable.
Using this meter, marketers and researchers can determine the following price definitions:
Point Of Marginal Cheapness (PMC)
The price points where more sales would be lost due to questionable quality than would be gained from bargain hunters.
Point of marginal expensiveness (PME)
Price point above which cost is a serious concern, where it is felt that the product is too expensive for the value derived from it.
Optimum Price Point (OPP)
At this price point, the percentage of customers that feel the product is too expensive is the same as those who feel it is so low that the quality is questionable.
Indifference Price Point (IPP)
Point at which the same percentage of customers feel that the product is getting too expensive as those who feel it is at a bargain price. This is the point at which most customers are indifferent to the price.
Range of Acceptable Pricing (RAI)
The difference between the point of marginal cheapness and the point of marginal expansion.
Example Van Westendorp chart analysis
Why you should use the price sensitivity meter
The Van Westendorp is considered the best of both worlds when it comes to getting an accurate picture of your pricing without investing hundreds of man-hours into complex technical analyses.
Van Westendorp’s Price Sensitivity Meter uses open-ended questions combining price and quality. Since there is an inherent assumption that price is a reflection of value or quality, the technique is not useful for a true luxury good (that is, when sales volume increases at higher prices).
How to run your own Van Westendorp pricing analysis
Ready to run your own Van Westendorp pricing analysis? Get started by asking the right questions.
1. Ask the right questions
The meat of the Price Sensitivity Meter is based off of customer answers to these four questions.
- At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
- At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
- At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
- At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)
There is disagreement online over the correct order of questions, so you should probably just choose the order that feels right to you.
These questions can be asked in-person, by telephone, or (hopefully) through online surveys. What is important however is that the answers are validated. This means that someone’s “too cheap” should not be greater than their “too expensive”.
If you find that you collected data in which respondents have made this mistake – you should clean the data and eliminate these inconsistencies before analyzing.
Excel formulae make it easy to do the checking, but to simplify things for an eyeball check, make sure the questions are ordered in your spreadsheet as you would expect prices to be ranked, that is Too Cheap, Bargain, Getting Expensive, Too Expensive.
Ensure that the values are numeric (you did set up your survey tool to store values rather than text didn’t you? – if not another Excel manipulation is needed), and then create your formula like this:
IF(AND(TooCheap<=Bargain,Bargain<=GettingExpensive, GettingExpensive<=TooExpensive), OK, FAIL)
|ID||Too Cheap||Bargain||Getting Expensive||Too Expensive||Valid|
Perhaps respondent 3 didn’t understand the meaning of the questions, or perhaps they didn’t want to give a useful response. Either way, the results can’t be used.
2. Interpreting the Van Westendorp plots
The point of marginal expensiveness – rather than the optimal price point – is the price to be recommended.
According to popular macroeconomic theory — demand for the product almost always drops off at the point of marginal expansion. This is where the theoretical tested item should be priced.
3. Modifications to Van Westendorp
Remove “Too Cheap” if you’re a SaaS or a mobile app.
There are some cases where data points don’t make as much sense as they did in the 1970’s. For example: Few consumers would ever say that Modern SaaS and mobile app companies offer their prices ‘too cheap’. For modern web-based businesses this data point is, for the most part, a moot point.