In a previous article about how to write product concepts for testing, I mentioned receiving a survey from a trade association which was trying to gauge my interest in online market research course using a concept description to which I couldn’t relate.
They also tried to estimate how much I was willing to pay for such courses by using a version of the four standard questions from the Van Westendorp Price Sensitivity Meter:
- At what price it is too cheap?
- At what price it is a good value/bargain?
- At what price it is getting expensive?
- At what price is too expensive?
In the Van Westendopr PSM approach, the results are displayed graphically using plots of cumulative percentages for each question by price point in order to find the “acceptable” price range and optimal price point. The point where Too Cheap and Expensive intercept is considered the lower bound (Point of Marginal Cheapness), while the point where Cheap and Too Expensive meet is the upper bound (Point of Marginal Expensiveness) of the product’s perceived value. The point where Too Cheap and Too Expensive cross is called the optimal price, which is the point where the number of rejectors is expected to be minimized.
This approach is popular among some market research practitioners, because is very simple to implement and intuitive to the respondents and marketers. However, the output is often confusing to clients, not only because of the mental gymnastics they have to do to read all the curves and their relationships in the standard graphic, but also because it has no theoretical foundation.
Another concern with the PSM is that since it relies on direct questions about price, it makes the intentions of the research too obvious for respondents, which usually invites price lowballing. The chart below shows an example of a test we did for an established product, where the resulting “optimal” price point was $10 lower than its current price, which fell completely outside of the “acceptable” price range yielded by the Van Westerndorp PSM. Further tests showed that if we were to price the product as suggested by the PSM, we would leave a lot of money on the table since price was not the main purchase driver and no significant increase in volume could be expected by lowering the price.
Since the Van Westerndorp PSM doesn’t take into account competition, it is usually recommended for new products, but I find counterintuitive the notion that for a totally new product for which potential customers don’t have any point of reference or experience, we ask them to provide an estimation of its value. How can they really give us an accurate estimate? The Van Westerndorp PSM may be useful for exploratory research to get a ballpark of acceptable price ranges, but I wouldn’t make a decision on its results without further research.
Regarding the case that inspired this post, using the Van Westerndorp PSM was an unfortunate approach. Online training using webinar-like setups are nothing new at this point, so the trade organization that sent me the survey is likely to see lower or similar prices to competitor alternatives. While I was answering the survey, I couldn’t but think of the prices I have seen for online classes and use them to guide my answers. It didn’t help that the concept was not well described, so I didn’t have much to hang on.
Following the questions from the Van Westerndorp PSM, I got this question:
If the online courses were offered in a bundle, with multiple courses of like subjects/topics packaged together, how much of a discount would you expect compared to buying those courses individually?
Really? What about “Over 50%”? Why would I want to get less than that? That’s the mindset we don’t want respondents to have.
As a way of summary, if you are thinking about using the Van Westerndorp PSM for pricing research, think again and consider that this approach:
- Incites lowballing by relying on direct questions about price
- Has no solid theoretical foundation
- Does not take into account competition
- Has no history of predictive success
- Does not allow us to optimize revenue, profits or net present value
If you still want to do it, regard its results are exploratory and follow-up with more research.
Which price research the trade association should have used to find the optimal prices and discounts for its online market research classes? Check Conjoint Analysis And Realism In Price Research.