How to Use a Van Westendorp Pricing Model to Inform Pricing Strategy
In this blog post, learn how to leverage an automated Van Westendorp Pricing Model to inform your company's pricing strategy.
Table of Contents:
- What is a Van Westendorp analysis?
- When should I use Van Westendorp analysis and what will it tell me?
- How can quantilope help?
What is a Van Westendorp analysis?
Van Westendorp (also known as Price Sensitivity Meter (PSM)) is a market research methodology first introduced in 1976 by the Dutch economist Peter van Westendorp. It establishes a range of acceptable prices for a product or service and ultimately identifies an Optimal Price Point (OPP).
The model does this by asking respondents to give reactions to a number of specific price points. Their reactions indicate how likely they are to make a purchase depending on the price.
Van Westendorp questions typically run along the following lines:
At what price would you consider the product to be too expensive that you would not consider buying it?
At what price would you consider the product becoming expensive but you might still buy it?
At what price would you consider the product to be cheap and a good value for your money?
At what price would you consider the product to be too cheap for you to buy because the quality would be compromised?
When should I use Van Westendorp analysis and what will it tell me?
Van Westendorp is ideal when you have a new product or service and you want to research where it should sit price-wise in the market.
Say for example you have a new bread product that you'd like to introduce into your range. You already have an extensive variety of bakery products within your brand, and beyond this, your competitors have impressive ranges too. There are a lot of factors that consumers will take into account before buying from the category, including perceptions of brands, marketing messages, dietary needs, product purpose, and packaging. Their views on price will be driven by all of these factors and more (which you should determine as part of your research program since reactions to price cannot be separated from those factors). You will therefore need to present to consumers a description of your product, including brand and other driving factors so that they can evaluate the price points presented to them with as much background information as possible.
The aim when deciding on your price point is to find one that reflects how consumers perceive your product's brand credentials, quality, and relevance, but also how it will sit in relation to similar products on the market. Too cheap and it will project an image of low quality; too expensive and similar competitor products will win the market share. Your Optimal Price Point will be the one where the highest number of people will feel it offers good value for the quality and will therefore buy it.
Once respondents have been surveyed, the reactions to price points are plotted on a line graph. To find the OPP, the boundaries of an acceptable price range need to be found, and this sits within the Point of Marginal Cheapness (PMC) and the Point of Marginal Expensiveness (PME).
The PMC is at the lower bound of an acceptable price range, where 'too cheap' and 'expensive' intersect on the line graph. Going lower than this price would adversely affect perceptions of product quality.
The PME is where 'too expensive' and 'cheap' intersect, and is the upper bound of an acceptable price range. Going beyond this price point would lose many customers who find the price too high.
The Indifference Price Point (IPP) is where 'cheap' and 'expensive' intersect. This is the price point at which equal numbers of respondents feel the price is cheap or expensive, and although this price point isn't the advised one to set, it can help in guiding pricing if the OPP is too low for your business.
The Optimal Price Point (OPP) occurs at the intersection of the 'too cheap' and 'too expensive' lines. This is the point at which an equal number of respondents describe the price as too high or too low and is optimal because it would minimize the number of people who would be dissatisfied with the price.
It is worth bearing in mind that the range of acceptable prices in this pricing analysis is entirely from the point of view of the consumer. It's hugely helpful to know what consumers will be prepared to pay, but this also needs to be balanced with your business costs and profit margin targets.
How can quantilope help?
quantilope users can leverage the Van Westendorp/PSM method to quickly and easily understand consumer perceptions of price points and guide pricing decisions.
With quantilope, the necessary four questions needed to run a Van Westendorp analysis are automatically added to your questionnaire just by selecting the method from quantilope's method library. In doing so, you remove any guesswork in phrasing questions the right way or asking the right questions to begin with.
Once the method is added to the survey, pricing research is made simple thanks to quantilope's built-in automated analysis tools, offering a variety of chart options so that you can clearly see metrics such as: where the range of acceptable prices lies, the profile of your potential customers, and more. All these different chart types are generated with the click of a mouse, simply by selecting each type from the analysis dropdown menu.
Check out a brief PSM demo video here to see how straightforward it is to create a Van Westendorp analysis, and check out how this pricing method helped determine how much consumers are willing to pay for a pair of sneakers.
To learn more about quantilope's Van Westendorp/PSM pricing tool, get in touch below: