OBJECTIVE
Determine consumer
price preferences.
DESCRIPTION
People are asked to define prices for a product
at four levels: too cheap, cheap, expensive, and too expensive. The questions usually
asked are:
- - At what price would you consider the product to be so expensive that you would not buy it? (Too expensive)
- - At what price would you consider the product to be so inexpensive that you would doubt its quality? (Too cheap)
- - At what price would you consider the product to start to be expensive enough that you could start to reconsider buying it? (Expensive)
- - At what price would you consider the product to be good value for money? (Cheap)
The results are
organized by price level, with the accumulated demand for each question. The
demand is usually accumulated inversely for the categories “cheap” and “too
cheap” to define crossing points with the other two variables (Figure below).
Van
Westendorp’s Price Sensitivity Meter
From the four
intersections, we have the boundaries between which the price should be settled
(lower bound and upper bound). Although the other two price points are
sometimes used, I prefer to use this model to define the lead prices and upper
prices for a product, while the middle prices should not be static but should
change based on several factors (period of purchase, place, conditions, etc.).
With this model we can
define price boundaries, but we cannot estimate the purchase likelihood or
demand. For the estimation of the demand (and revenues), we ask an additional
question regarding the likelihood of buying the product at a specific price
with a five-point Likert scale (5 = strongly agree, 1 = strongly disagree). The
price to be tested can be the average of the “cheap” price and the “expensive”
price for each respondent. A more comprehensive approach would be to ask the
question for both the “cheap” and the “expensive” price. Then the results must
be transformed into purchase probabilities, for example strongly agree = 70%,
agree = 50%, and so on. With these results we can build a cumulative demand
curve and a revenue curve (Figure below). The optimal price is the one at which the revenues
are maximized (be aware that this approach aims to maximize revenues and does
not take into account any variable costs).
Van
Westendorp’s PMS Extension with Demand and Revenue Estimation
TEMPLATE
Discount code -40%: BLOG_ANALYTICS_MODELS