Price Sensitiy Meter (V)

The Price Sensitivity Meter (PSM), also known as the Van Westendorp Price Sensitivity Meter, is a market research tool used to assess consumers' perceptions of pricing for a product or service. Developed by Dutch economist Peter van Westendorp, the PSM helps businesses determine the optimal price range based on how much customers are willing to pay.

Step-by-Step Guide:

The Price Sensitivity Meter (PSM), also known as the Van Westendorp Price Sensitivity Meter, is a pricing tool used to understand how customers perceive price points for a product or service. Here’s a step-by-step guide on how to conduct a PSM analysis:

Step 1: Prepare Your Survey Questions

Create a survey that asks respondents the following four key questions:

1. Too Expensive: "At what price would you consider this product/service too expensive to consider?"

2. Too Cheap: "At what price would you consider this product/service so cheap that you’d question its quality?"

3. Good Value (Cheap): "At what price would you consider this product/service a bargain, representing good value for money?"

4. Expensive but Worth It: "At what price would you consider this product/service expensive but still worth considering?"

Ensure the survey targets your ideal customer segment to collect relevant data.

Step 2: Gather Responses

• Collect responses from a statistically significant sample to ensure that the results are meaningful.

• You can conduct the survey using online tools like Google Forms, SurveyMonkey, or professional market research platforms.

Step 3: Plot the Data

Once you have collected the responses, plot the data on a graph:

• The x-axis represents the price points.

• The y-axis represents the percentage of respondents.

For each of the four questions, plot the cumulative percentage of respondents who gave each price point as their answer. This creates four curves:

1. Too Expensive: A line showing when respondents feel the product becomes too expensive.

2. Too Cheap: A line showing when respondents feel the product is suspiciously cheap.

3. Good Value: A line indicating the price at which respondents think the product is a bargain.

4. Expensive but Worth It: A line showing when respondents feel the product is expensive but still justifiable.

Step 4: Identify Key Price Points

The graph will highlight several key intersections:

• Point of Marginal Cheapness (PMC): The point where the “Too Cheap” and “Good Value” lines intersect. Prices below this are seen as too cheap.

• Point of Marginal Expensiveness (PME): The point where the “Expensive but Worth It” and “Too Expensive” lines intersect. Prices above this are considered too expensive.

• Indifference Price Point (IPP): The price where the same number of respondents consider the product both cheap and expensive. This is typically the optimal price point.

• Optimal Price Point (OPP): The price at which most people feel the product is fairly priced.

Step 5: Analyze the Results

• Use the identified price points to set a price range for your product or service.

• If the optimal price (IPP) is lower than you expected, consider adjusting the product features or perceived value.

• If the marginal expensiveness (PME) is too high, you may want to reconsider your pricing strategy for premium segments.

Step 6: Adjust Your Pricing Strategy

Based on the findings, adjust your pricing strategy:

• Test prices close to the optimal point to maximize sales.

• Use the marginal cheapness and expensiveness points to determine the price floor and ceiling.

This process allows you to identify the price that resonates best with your target audience, balancing perceived value and profitability.

Example:

Vivel Cell Renew, a body lotion product by ITC, aimed to determine an optimal price for their 250ml product. They wanted to balance consumer expectations with profitability, specifically targeting females aged 20-35.

Method: Using the Van Westendorp Price Sensitivity Meter, the company surveyed 240 respondents in India. The respondents were asked four key questions:

• At what price would the product seem too cheap, making you question its quality?

• At what price would the product be a bargain?

• At what price would the product feel expensive but worth considering?

• At what price would the product be too expensive to purchase?

Findings:

• ₹170 (CHF 1.70.-) was considered the lowest acceptable price that still maintained a sense of quality.

• ₹190 (CHF 1.90.-) was identified as the optimal price, balancing value and affordability.

• Prices above ₹190 (CHF 1.90.-) were deemed too expensive by most respondents.

Outcome: Based on the study, Vivel positioned the 250ml lotion at ₹190 (CHF 1.90.-) to maximize appeal and profitability while satisfying customer expectations. This case demonstrates how the PSM method helped Vivel accurately gauge consumer perceptions and set a profitable, customer-friendly price point.

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For more information on the topic, please see the source below:

Chhabra, S. (2015). Determining the Optimal Price Point: Using Van Westendorp’s Price Sensitivity Meter. In: Chatterjee, S., Singh, N., Goyal, D., Gupta, N. (eds) Managing in Recovering Markets. Springer Proceedings in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-1979-8_20  

Klingemann, W., Kim, JY., Füller, K.D. (2022). Willingness to Pay. In: Homburg, C., Klarmann, M., Vomberg, A. (eds) Handbook of Market Research. Springer, Cham. https://doi.org/10.1007/978-3-319-57413-4_35  

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#Willingness to pay