As you increase or decrease prices, the difference grows directly into or out of operating profits.
Pricing is also complex. When setting prices, marketers must consider:
- How much customers are willing to pay
- The cost of their products and services
- Competitors’ pricing policies
- Market changes that affect demand
This post takes a look at the van Westendorp Pricing Model, a widely-used pricing technique. I’ll explain why I almost never recommend van Westendorp for pricing analysis, except in conjunction with other methodologies. In an upcoming post, I’ll tell you what works better for pricing strategy.
What is the van Westendorp Pricing Model?
Conceived in 1976 by Dutch economist Peter van Westendorp, the van Westendorp Pricing Model is a method for gauging consumers’ perceptions of the value of a service or product. Sometimes known as the Price Sensitivity Meter (PSM), this technique evaluates a range of price points under consideration. Specifically, the technique seeks to identify the price consumer interest begins to fall off. It is also used when a marketer wants to evaluate the impact of pricing changes or to see how consumers view their prices versus the competition.
How is van Westendorp used for pricing strategy?
In a van Westendorp study, survey participants are asked four questions:
- At what price do you think the product/service is priced so low that it makes you question its quality?
- At what price do you think the product/service is a bargain?
- At what price do you think the product/service begins to seem expensive?
- At what price do you think the product/service is too expensive?
Marketers can either give participants a price scale representing both ends of the price spectrum or let participants provide open-ended answers. The responses to each question are plotted on a graph called a Price Map. See the Respondent’s Perception of Price-Value chart below.
The intersection of certain data points gives marketers information about the respondent’s perception of price-value through the Optimum Price Point (OPP) and the Indifference Price Point (IDP). The OPP is the intersection at which the same number of participants rate the price as either “too expensive” or “too cheap.” The IDP is the point where an equal number of participants rate the price as either “cheap” or “expensive.” (If this method for setting pricing strategy is beginning to sound complicated, it’s because it is complicated!)
The following Price Map, another part of van Westendorp analysis, shows the Range of Acceptable Prices. The range trades off the point at which sales volume is lost due to a perception of poor quality, versus the point at which volume is gained due to the product being considered a bargain (PMC) and the point where the same number of people perceive the product to be “too expensive” and “not expensive” (PME).
Why you should probably not use van Westendorp for pricing strategy
At first look, van Westendorp seems to have a lot going for it. Marketers use van Westendorp for pricing analysis because it is simple to execute, asks questions that are easy for respondents to answer, and provides tools that appear to be easy to understand. For example, the range of acceptable prices is intuitively very appealing because it indicates the price points that a product or service should be above or below.
Unfortunately, when you think about van Westendorp pricing analysis, it has many flaws and problems. One of these problems are the graphs you see in this post. They are filled with criss-crossing lines that are not that easy to explain or understand.
A bigger problem, however, is that this methodology lacks a sound methodological foundation. Is it true that every product has a price below which it is so cheap that you would question its quality? That might be true for some products or services, but for others, the lower the price the more we might buy.
I have never found a clear explanation of the theory explaining why van Westendorp analysis works. I believe the reason for this lack of explanation is that there is no clear foundation for the method. Much of the method relies on a black box that users must accept (or not accept).
There are other problems. For example, it might be possible that the way these questions are phrased, some respondents would low ball their estimates. Also, the technique does not maximize revenues or profits, or even consider them, for that matter.
A final issue I’ll mention is that van Westendorp does not consider competitive products or competitive responses. One possible response to criticism that the technique does not consider competitive responses is that it is only recommended for new products. However, it may not be reasonable to ask respondents to answer the van Westendorp pricing questions regarding a new product about which their knowledge is limited.
What else can be used for pricing strategy?
As I mentioned earlier, I plan to write a future post describing some alternatives to van Westendorp for pricing strategy. One technique I like is conjoint analysis, which is methodologically sound and works well with pricing. You can learn more about conjoint at the MMR Strategy Group Resource Center.
I also like using demand curve analysis where revenues and demand can be analyzed at different price points using purchase intent scores from surveys.
Dr. Bruce Isaacson
MMR Strategy Group