Pricing Research – Van Westendorp Price Sensitivity Meter (PSM)
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, but generally are based on the following four questions:
- At what price is the product so expensive that you would definitely not consider buying it?
- At what price is the product so inexpensive that you would you doubt the quality of the product?
- At what price would you consider the product to be getting expensive and would have to give serious consideration before buying
- At what price would you consider the product to be cheap and great value for money?
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 it’s 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 questionning, 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.