THE PRICE IS RIGHT: Using the van Westendorp Price Sensitivity Analysis to Help Set Price
This is a technique for gauging consumers’ price expectations for a finished product, often an existing product in an established category. It enables the marketer to see a range of prices that might be appropriate, and to see the fall off in consumer interest that occurs as price rises. It has been deployed widely across many CPG and non-CPG products. It can be particularly useful if the marketer is contemplating a change in pricing, or wants to understand consumer perceptions of own products vs. a competitor’s products.
What is it?
The van Westendorp Price Sensitivity Analysis (PSA) determines a range of acceptable prices and an optimal price point based on an analysis of price/value ratings obtained from consumers. Key data analyzed is from responses to questions about what prices for a product or service are considered too high or too low. Plotting this information onto Price Maps shows high/low price thresholds as well as the price point considered optimal.
What is it for?
The PSA model is often used during the new product development phase to aid in setting price. Whether a client is contemplating an aggressive entry price strategy or a premium skimming approach to price, the van Westendorp PSA can help determine which strategy is best. Established brands will use the PSA model to guide pricing for re-positioning or other pricing decisions, often as input to a test market.
How does it work?
Respondents are asked 4 questions:
Q1: At what price would you consider the product/service to be priced so low that you feel that the quality can’t be very good?
Q2: At what price would you consider this product/service to be a bargain—a great buy for the money?
Q3: At what price would you say this product/service is starting to get expensive—it’s not out of the question, but you’d have to give some thought to buying it?
Q4: At what price would you consider the product/service to be so expensive that you would not consider buying it?
Note: Responses can be either open-ended or obtained with price points shown. If a scale is provided, care must be taken to ensure that a broad enough range is represented to capture both ends of the price spectrum.
What does it show?
Responses to each question are plotted on Price Maps. It is the intersection of key data points that yields insight about the Optimal Price Point (OPP) as well as the Range of Acceptable Prices. In the example below, the Optimal Price Point is shown to be about $1.70, as indicated by the intersection of the lines for Q1 Too Cheap—Poor Quality and Q4 Too Expensive.
Other Price Maps are produced to provide the Acceptable Price Range. Plots of Questions 2 and 3 are inverted* and overlaid with plots of Questions 1 and 4 to define the upper and lower bounds of an Acceptable Price Range. The point at which Q1 (Too Cheap—Poor Quality) intersects with the inverted* Q2 (A Bargain) shows the lower price threshold, the Point of Marginal Cheapness (PMC). This shows the point at which more sales volume would be lost because quality perceptions would become an issue than would be gained because the product would be considered a bargain.
In a recent new product test that Nufer Marketing Research conducted for a client, a van Westendorp analysis showed that the entry price point being considered for the introduction was too low, as it was outside the acceptable range. This suggested that the entry price was too aggressive and may have led to consumers questioning the quality of the product.
The upper boundary of the price range is shown by the plotting of Q4 (Too Expensive) and the inverted* Q3 (Starting to Get Expensive). The point at which these two lines cross is the Point of Marginal Expensiveness (PME) and shows the price beyond which cost becomes a serious concern to consumers and the value perceived in the product is not worth the cost. In a PSA analysis for an existing brand, Nufer Marketing Research found that the commodity cost driven price increase a client was exploring was within 1% of the PME upper price threshold, and since the brand was the market leader, it was recommended that the price increase be taken, since it was anticipated that competitive brands would follow.
* The plots are inverted by plotting them in reverse order to reveal the % of respondents who consider the product to not “be a bargain” (Q2) or to not be “starting to get expensive” (Q3).
The professionals at Nufer Marketing Research, Inc. have found that the van Westendorp PSA has been a real aid to helping clients make pricing decisions. New and established businesses have benefited from the guidance provided. And, the relative simplicity of the model means that the cost and timing to get these answers is not daunting. The information provided here is a synopsis of what this technique delivers; we would be glad to discuss it in more depth with you.