21. VAN WESTENDORP PRICE SENSITIVITY METER

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

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