Making The Case Against The Van Westerndorp Price Sensitivity Meter

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Van Westerndorp Price Sensitivity Meter

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.

 

Van Westerndorp Price Sensitivity Meter

 

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?

 

  • No discount
  • 1-10%
  • 11-20%
  • 21-30%
  • 31-40%
  • 41-50%
  • Over 50%
  • Not sure

 

 

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.

 

Comments Comments

Jeffrey Adler Posted: February 15, 2011

There is no perfect pricing research methodology. As such, choosing between pricing research methods is a “trade off” in and of itself!

The Van Westendorp Price Sensitivity Meter is a PERCEPTUAL tool. As such, there are some scenarios where it may be a better choice than something like conjoint. One example of this is in healthcare. The price perceptions of a prescribing physician can clearly be important in brand choice. However, in most cases, the physician is not actually “purchasing” the brand — so using a method which assumes the physician is “trading off” price vs. other attributes in some sort of linear fashion is typically misleading.

A look at Peter van Westendorp’s original work (be sure to have it translated from the Dutch!! :-)) may convince you there is some theoretical foundation for the VW PSM, and there is even good evidence that competition can be accounted for in the way respondents seem to think about the questions.

Rishabh goyal Posted: February 27, 2011

Hi Michaela,

Just a small query.. we know that the question about good value / bargain lowballs the prices, but there is also a question about expensive (till what price you would consider it buying).. can we take that price as the real price that consumer can pay?? I mean respondent really think about that price as optimal but answers the lower price in good value question but he tells the correct price in expensive question.. its just my thought process, i have not conducted such type of survey to prove it.. whats your take on it??

Michaela Mora Posted: February 28, 2011

Hi Rishabh,
I’m not sure I understand your question. The real price at which a consumer will buy depends on many factors (competitors’ prices, personal situation, availability, etc.), you will get an approximation to a “real price,” the more accurately you simulate the actual purchase occasion in your research. The PSM method doesn’t take into account these factors.

dominic allen Posted: March 22, 2011

Hi Michaela

Is there any way to obtain a price volume relationship using the PSM? For example, could we ask how many purchases out of the next 100 would a person make at the optimal price and then at 10% plus or minus the optimal price?
Thanks

Michaela Mora Posted: March 25, 2011

Dominic,

Are you thinking of asking a volume question in a post-study or in the same study where you have the PSM questions? You won’t be able to estimate the optimal price point on the fly, but you could ask a volume question after the “bargain/value” or “expensive” question as an application of the Newton, Miller and Smith’s extension of the PSM. Check this post from Jeffrey Henning: https://bit.ly/dIga47. I still don’t think this approach will give you accurate results. If you do it, I’d love to hear what external validity you got.

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