At what price would you consider this product to be cheap?
At what price would you perceive this product to be too expensive?
At what price would you consider this product to be priced so cheaply that you would worry about its quality?
At what price would you consider this product to be too expensive to even consider buying it?
These four very direct and intuitive questions form the basis of the Van Westendorp pricing exercise – a quantitative research technique that can actually yield robust and compelling data reflecting consumer demand. We’ve been thinking about the wide variety of quantitative analytical techniques we use in our work, and thought we’d provide a quick overview on this one.
The Van Westendorp pricing exercise is a price sensitivity measurement devised by a Dutch psychologist, Peter van Westendorp. This technique uses four questions about a product or service (drafted more or less like those above) and requires the respondent to gauge prices that are too cheap and too expensive in context with the product or service’s offerings and perceived benefits.
Frequency distributions from these questions are derived and plotted, yielding the range of pricing options for the product. As the final step in this process, purchase intent is measured at the highest and lowest prices in the range of pricing options. The optimal price (i.e., the price which maximizes market share while generating the highest possible revenue) can then be computed, along with the precise range of acceptable pricing.
The data points on the example chart are plotted a little loosely, but the point at which the Too Cheap and Too Expensive responses intersect is considered the Optimal Price Point (OPP). The intersection of Expensive and Too cheap yields the Point of Marginal Cheapness (PMC). At this price point, the number of people considering the product to be too cheap is the same as the number considering it to be expensive.
The intersection of Cheap and Too Expensive yields the Point of Marginal Expensiveness (PME). At this price point, the same number of people regard the product to be too expensive as regard it cheap. The range from PMC to PME is the Range of Acceptable Prices (RAP), or the Optimal Price Band.
We also conduct pricing studies using conjoint and discrete choice designs, but the Van Westendorp pricing method is the most efficient way to evaluate price sensitivity itself, as the resulting data resulting is easy to interpret, identifies an entire range of acceptable price points, and provides a solid basis to assess future pricing strategies, ensuring that the optimal price-value balance is established. Contact us if you’d like to learn more about this research technique.