Van Westendorp PSM

What is Van Westendorp (PSM) methodology and how is it used in market research.

The Van Westendorp Price Sensitivity Meter (PSM) is a market research technique used to determine consumer price preferences by identifying acceptable price ranges for a product or service. Developed by Dutch economist Peter van Westendorp, this method involves asking consumers a series of structured questions to gauge their perceptions of price value.

1. At what price would you consider the product to be so inexpensive that you would question its quality? (Too Cheap)
2. At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)
3. At what price would you consider the product to be getting expensive, but still worth it? (Expensive)
4. At what price would you consider the product to be too expensive to consider purchasing? (Too Expensive)

How is Van Westendorp applied in market research

• Survey Design: Develop a survey incorporating the four Van Westendorp questions for or more product. Ensure the product description is clear and consistent for all respondents.
• Data Collection: Administer the survey to a representative sample of the target market. This can be done through online surveys, in-person interviews, or focus groups.
• Data Analysis:
  • Plotting Responses: Collect and plot the responses to the four questions on a cumulative frequency distribution graph. Each question generates a curve representing the percentage of respondents who find the price too cheap, cheap, expensive, or too expensive as seen below:
    
    

• • Intersecting Points: Identify key intersection points on the graph:
    • Point of Marginal Cheapness (PMC): Where the "Too Cheap" dark green curve intersects the "Too Expensive" light green curve. In this example, $9.00.
    • Point of Marginal Expensiveness (PME): Where the "Not Bargain" blue curve intersects the "Not Expensive" dark blue curve. In this example, $22.00.
    • Indifference Price Point (IPP): Where the "Too Cheap" dark green curve intersects the "Not Expensive" blue curve. In this example, $18.00.
    • Optimal Price Point (OPP): The point where the distance between the "Too Cheap" and "Too Expensive" curves is the greatest, indicating the most acceptable price range. In this example $16.00.

Benefits:

• Price Range Identification: Helps identify a range of acceptable prices from the consumer's perspective, aiding in setting a competitive and attractive price.
• Consumer Insight: Provides insights into consumer price perceptions and value assessments, helping to align pricing strategies with market expectations.
• Market Segmentation: Allows for the analysis of different consumer segments based on their price sensitivity, enabling targeted pricing strategies.
• Product Positioning: Assists in positioning the product in the market by understanding the perceived value relative to price.

Limitations:

The Van Westendorp Price Sensitivity Meter (PSM) is a widely used tool for determining acceptable price ranges and optimal price points for products or services. However, like any research methodology, it has its limitations. Here are some of the key limitations of the Van Westendorp model:

Simplified Assumptions

• Limited Context: The model does not consider the broader context in which pricing decisions are made, such as brand perception, competitive dynamics, or specific market conditions.
• Static Preferences: Assumes that consumer price perceptions are static and does not account for changes over time, external factors or simply the likelihood of them buying a product at a specific price as PSM does not take likelihood into consideration.

Subjective Responses

• Hypothetical Scenarios: Respondents are asked to provide opinions based on hypothetical price points, which may not accurately reflect their actual purchasing behavior in real-world situations.
• Bias and Inconsistency: Responses can be influenced by biases, such as the respondent's current financial situation, mood, or interpretation of the product's value.

• Single Product Focus: Typically used for individual products or services, making it less effective for complex product lines or bundles where interactions between different items are significant.
• Feature Sensitivity: Does not directly account for the importance of different product features or attributes that might affect willingness to pay.

Lack of Competitive Context

• Competitive Pricing: The model does not incorporate competitive pricing data, which is crucial for understanding market positioning and potential price wars.
• Market Dynamics: Fails to consider market dynamics such as supply and demand fluctuations, economic conditions, or seasonal effects.

Example Application:

A company launching a new smartwatch uses the Van Westendorp methodology to determine the optimal price range. After surveying potential customers, the company plots the responses and finds that the acceptable price range is between $150 (PMC) and $300 (PME), with an optimal price point (OPP) at $225. This pricing insight helps the company position the smartwatch competitively while meeting consumer expectations of value and quality.

Conclusion

The Van Westendorp Price Sensitivity Meter is a tool for businesses seeking to understand consumer price perceptions and set prices that maximize market acceptance and profitability. However, it also has a number of weaknesses since its inception in 1976, and better methods such as PriceBeam's Comparative Willingness-to-Pay are more up-to-date and better suited for making informed pricing decisions that align with customer expectations and market dynamics.