The Van Westendorp pricing technique, also known as the Price Sensitivity Meter (PSM), is a market research technique used to determine the optimal price point for a product using consumer price preferences and perceptions. The PSM was developed by Peter Van Westendorp, a Dutch economist in 1976 and is still widely used amongst professional research industry today.
The traditional and most commonly used PSM pricing research approach is based on four price-related questions, which are then evaluated as a series of four cumulative distributions, one distribution for each question. The points or intersections where curves/lines cross are often felt to be critical points. The standard question formats can vary, the consumer research is generally based on the following four questions:
The cumulative frequencies are plotted on a single chart so that intersections can be seen. The standard method requires that two “too cheap” and “cheap” cumulative frequencies are inverted/reversed so that four intersecting points are created. The points where the cheap/expensive lines intersect are often considered the optimal price range.
The Van Westendorp pricing technique is best used when applied to a product within an established market where consumers have an idea about pricing. Prior to asking the pricing questions, it is important that respondents are given a detailed explanation of the product and its features, benefits and emotional triggers. It can also be useful to show similar or competitor products and prices where buyers are likely to make price comparisons.
Other pricing techniques to consider, include simple willingness to pay questioning, Monadic price testing, Brand Price Trade-Off (BPTO) and Conjoint Analysis, willingness to pay or analysis of actual sales or trials using regression methods to assess price elasticity.