Using the Van Westendorp Model for Pricing Research
Organizations tasked with making a profit operate under a strategy which is dependent upon multiple factors including market share; volatility; brand position; and other factors including the current state of the economy. The primary goal here is to maximize the profit generated by the firm. Understanding your current (and prospective) markets’ view on pricing is a key driver revenue and profit margin.
If your product or service and their attendant features are considered set then a survey pricing model is appropriate. The price sensitivity meter (PSM) was initially created by Dutch economist Peter van Westendorp in 1976. The model is based on responses to four primary survey questions. When the cumulative frequency distributions for these questions are graphed they produce a range of prices the market considers acceptable. The four price points respondents are asked to identify include:
At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)
The model is easy to implement when compared to other pricing research methods. It can be used in support of both new and existing products and services. To be effective the survey researcher should include a description and/or visual of the product/service. The graph below shows and example of the visual analysis. Note that the curves for “good value” or “inexpensive” and “too cheap” or “too inexpensive” are inverted so four points can be created.
In deploying a Van Westendorp exercise is common to provide the respondent a pre-established range of prices using 10 – 15 categories for each price estimate. Prices can also be captured in an open response fashion and categorized after the fact.
Extensions to this technique ask supplementary questions regarding purchase likelihood for the “good value” and “expensive” price points. It is also fair to ask the respondent to elaborate on their reasons for selecting their price points. These additions can be useful for translating the survey data into a demand forecast. Here is a pricing study template you can start with to evaluate the right price for your product or service.