What’s wrong with van Westendorp Pricing Model?

Pricing Research One of the most important decisions a product manager must make is how much to charge for his product. Researchers have spent a lot of time and effort striving to understand how price interacts with consumer needs and behaviours. How price of a product affects consumers purchasing behaviours? Can we sell an elite product at a level above that of its competition? How much more? We have several ways of investigating price sensitivity, all of them imperfect.

The simplest form of pricing research is to ask respondents directly “How much are you willing to pay for product X?” Not commonly used. Van Westendorp Pricing Model Monadic Concept Test with prices Discrete Choice Experiments Direction question: Impossible to hide the focus on price. Respondents shift to “bargaining” mode and respond with their “opening” offer. The method is open to “lowball” answer. Monadic concept: show respondent the product at a price and ask them if they will purchase it. Different respondents will see different prices. DCM: show respondents all the products in the competitive market place and ask them to shop as usual.

van Westendorp Pricing Model Developed by Dutch economist Peter van Westendorp in the 1970s, van Westendorp Price Sensitivity Meter (PSM) gauges thresholds and provides a range of acceptable prices. Very popular among clients and researchers: FAST & EASY & CHEAP Small sample size: no need for multiple cells No need to do any research on products currently available on market. No need to know who the competitions are or what they are doing No need to spend money configuring the optimal respondent experience No expensive modeling cost Van Westendorp, P (1976) "NSS-Price Sensitivity Meter (PSM)- A new approach to study consumer perception of price." Proceedings of the ESOMAR Congress

van Westendorp Price Sensitivity Meter The PSM requires 4 questions to the questionnaire. By aggregating the proportion of people (at each of these prices), we develop a series of curves that will indicate the range of acceptable prices in the market place. At what price would you consider the product to be getting expensive, but you would still consider buying it? (EXPENSIVE) At what price would you consider the product too expensive and you would not consider buying it? (TOO EXPENSIVE) At what price would you consider the product to be getting inexpensive, and you would consider it to be a bargain? (BARGAIN) At what price would you consider the product to be so inexpensive that you would doubt its quality and would not consider buying it? (TOO CHEAP)

van Westendorp Output - PSM Range of Acceptable Prices - This is the range between the Marginal Point of Cheapness (MGP) and the Marginal Point of Expensiveness (MDP). The Optimal Price Point (OPP) typically is within this range. Marginal Point of Cheapness (MGP) - The marginal point of cheapness (MGP) occurs at the intersection of the ‘expensive’ and ‘too cheap’ curves. This point represents the lower bound of the range of acceptable prices. Marginal Point of Expensiveness (MDP) - This is the maximum amount that consumers think is reasonable for the product. The marginal point of expensiveness (MDP) occurs at the intersection of the ‘bargain’ and ‘too expensive’ curves.

van Westendorp Output - PSM Range of Recommended Prices – This is the range between the Indifference Price Point (IDP) and the Optimal Price Point (OPP). Indifference Price Point (IDP) - This is the price point at which the ‘bargain’ curve intersects the ‘expensive’ curve. At this price, an equal number of consumers perceive the product to be both cheap and expensive. Also called “Normal Price”. Optimal Price Point (OPP) - This is the point where the ‘too expensive’ curve and ‘too cheap’ curve intersect. The term optimal price point is misleading because it does not take into account other price considerations. The optimum price point (OPP) represents the point at which an equal number of respondents see the product as too expensive and too cheap. This represents the “ideal” price for this product. Price your product somewhere in the middle of what respondents profess to be the “Bargain” and “Expensive” prices. OPP – “ideal” only in the sense the same number of people who thinks the price is “too expensive” and “too cheap”. Doesn’t really make sense from any marketing decision point of view. It’s not the price that maximizes anything, revenue, profit, or trial.

van Westendorp Output - PSM Too cheap Bargain Expensive Too expensive

van Westendorp - Newton/Miller/Smith Extension With the addition of two purchase probability questions (at the BARGAIN and EXPENSIVE price points), it is possible to plot trial and revenue curves. It is safe to assume that the probability of purchase at the TOO CHEAP and TOO EXPENSIVE prices is zero. These curves will indicate the price that will stimulate maximum trial and the price that should produce maximum revenue for the company. The Newton Miller Smith Extension questions are as follows and we recommend a 5-pt purchase likelihood scale as the response category: At the (expensive price) how likely are you to purchase this product in the next 6 months? At the (bargain price) how likely are you to purchase this product in the next 6 months? Newton, D, Miller, J, and Smith, P, (1993) “ A market acceptance extension to traditional price sensitivity measurement." Proceedings of the American Marketing Association Advanced Research Techniques Forum.

van Westendorp Output – NMS Extension Trial and Revenue Curves feature the following points: Max Trial Point - This is the point at which the highest percentage of consumers will try the product. Max Revenue Point - This is the price point that the supplier would reach the maximum revenue for the product or service.

What’s wrong with it? The underlying premise of PSM is that There is a relationship between price and quality and that consumers are willing to pay more for a higher quality product. Assumptions: Consumers have ideas about what reasonable price they are willing to pay for a product and that consumers are willing to pay more for a high quality product. The model assumes that consumers consciously aware of these prices and will willingly state these prices when questioned directly. Assumption #2 is where vw runs into trouble? Is that what really happening during the bargaining process?

The Bargaining Process

The Bargaining Process The Buyer and the seller interacts with each other to arrive at a number both can agree to which is then the true market price. The opening bids from either the buyer or the seller are far away from the true price. Buyer Seller

The Van Westendorp Bargain Bargain Price Expensive Price Buyer Seller

What’s wrong with van Westendorp Pricing Model? Not presented in a competitive context. Does not reflect the purchase decision process PSM is more about what people already know about prices than what people are actually willing to pay. Because PSM results often resembles current market price, the results are often judged to have “face validity”. “price-consciousness of this nature should never be equated with propensity to buy.” - van Westendorp PSM is a simple test of price awareness, not price sensitivity. Price premiums are often underestimated. PSM is not recommended

Monadic concept tests on feasible prices: Alternatives Monadic concept tests on feasible prices: Single exposure only Sequential exposure (e.g. price laddering) leads the respondent into the game playing mode - not recommended. Need to know what prices are feasible to test Knowledge of current market: competition and current pricing Knowledge of the new product and where does it fit in that market. Expensive/large sample sizes: one cell for each price you are interested in testing Usually not presented in a competitive context Concept focus in on the client’s product. Difficult to present competitors fairly in a concept. You can also present all the products on a “market” setting without focus on the client’s product which becomes a single exposure DCM.

Alternatives Discrete Choice Experiments Expensive: large sample Slow: requires a lot of up-front work Difficult: requires expertise in this area Our best tool in understanding consumer’s willingness to pay and price sensitivity in a competitive market.

If you absolutely have to do van West Questionnaire Adjustments: The order of the four van Westendorp questions is not crucial. Typically, we recommend for you start by asking the “Expensive” question to shift away from the “bargaining” focus, followed by the “Too expensive”, “Bargain” and “Too cheap” questions. For some products and services, free does not affect the impression of quality. In this case it is not necessary to ask the question about “what price is so low you would doubt the quality”. Instead, add the following question to the Newton Miller Smith Extension: “If this service or product were free, how likely are you to use or purchase?” Sample Sizes: Large sample sizes are not necessary. Typically, a sample size of 150 is sufficient. It is important to keep in mind that outliers and illogical answers will be eliminated from the original sample size. Also, if splitting the data into groups (e.g. males and females), each will need about n=150. Development of Concept Statement: Do not include a price in the concept statement. Try to mirror shopping situation and behaviors as best as possible. Provide information about the product, but don’t over-sell it. The concept needs to remain honest and believable. For best results the concept should match how it will be communicated in the marketplace.

If you absolutely have to do van West Programming/Data: “Don’t know” responses can be problematic to the van Westendorp analysis. It is best not to accept “don’t know” responses. In case of “don’t know” responses the programming should be set up to skip the Newton Miller Smith questions for that particular price point. It is uncommon to lose more than 10% of responses because of “don’t know” unless the product is very unique. It is ideal to set up programming logic that does not allow illogical responses. For example, the programming should not allow the “expensive” price to be higher than the “too expensive” price. If that’s not possible, illogical answers can be eliminated on the back end. However, this will decrease sample sizes. Do not allow negative (i.e. <0) responses for the four pricing questions For Revenue Curves, scale points on the purchase likelihood question are assigned weights. Typically, we use a 5-point scale and the weights assigned to each point of the scale are .81, .27, .09, .03, 0. Different weights might be needed for different product types, costs, etc. Beware of outliers, which can have a large effect if left in the data. The standard is based to “too expensive” question and responses bigger than average plus two standard deviations are excluded from the analysis. This will lessen final sample sizes but will eliminate outliers which can have a major influence on the results.

If you absolutely have to do van West Reporting: In the reporting of the data, it is important to stress that the price ranges obtained from this method provide the commonly known price ranges. PSM is a test of price awareness, not price sensitivity The analysis does not give you the “optimum price”, or “recommended price” – despite such labeling in the output.