How can you use the Van Westendorp Price Sensitivity Meter to measure price sensitivity?

1 What is the PSM?

The PSM is a questionnaire-based technique that asks four questions to your customers or potential customers. These questions are: at what price would you consider the product to be too expensive, too cheap, expensive, and a bargain? The answers to these questions form four price points that can be plotted on a graph. The intersections of the curves indicate the optimal price range and the point of marginal cheapness and marginal expensiveness. This method can help you identify the ideal price range for your product, allowing you to maximize your profits while still providing customers with quality products at reasonable prices.

2 How to design the PSM questionnaire?

When designing a PSM questionnaire, it is important to follow some best practices to ensure the validity and reliability of your results. For example, use clear and simple language that your target audience can understand, and a consistent scale and format for the questions. Additionally, provide a realistic context and scenario for the product or service, being careful to avoid leading or biased questions. Finally, test and pilot the questionnaire before launching it to a larger sample.

3 How to analyze the PSM data?

To analyze the PSM data, you need to use a statistical software or a spreadsheet tool that can generate the graphs and calculate the intersections. First, calculate the mean and standard deviation for each question, then plot the mean values of each question on a graph with price on the x-axis and percentage of respondents on the y-axis. Draw two lines from the origin to the too expensive point and from the too cheap point to the 100% mark. These lines represent the upper and lower boundaries of the acceptable price range. Additionally, draw a line from the cheap point to the expensive point, which is known as the indifference curve where respondents are indifferent between buying and not buying. To find the intersections of these lines, solve equations or use a software tool. The intersection of the upper and lower boundaries is called optimal price point (OPP) where demand is maximized. The intersection of indifference curve and upper boundary is known as point of marginal expensiveness (PME), where demand starts to decline. Lastly, find the intersection of indifference curve and lower boundary which is known as point of marginal cheapness (PMC), where demand starts to increase.

4 How to interpret the PSM results?

Interpreting the PSM results requires considering the shape and position of the curves and the values of the intersections. The optimal price point (OPP) is the price that maximizes demand for your product or service, while the point of marginal expensiveness (PME) is the highest price you can charge without losing too many customers. The point of marginal cheapness (PMC) is the lowest price you can charge without compromising quality perception and profitability. The range between PME and PMC is the range of prices acceptable to most customers, and the slope and curvature of the curves indicate customers' degree of price sensitivity. A steep, convex curve shows high sensitivity to price changes, while a flat, concave curve indicates low sensitivity.

5 How to use the PSM insights?

The PSM insights can be used to make better pricing decisions and strategies for your product or service. You can set your initial price or adjust your existing price based on the OPP, PME, or PMC. Additionally, you can segment your market based on different price preferences and willingness to pay. Testing different price scenarios and measuring their impact on demand and revenue can also help identify opportunities for premium or value pricing based on quality perception and competition. Lastly, optimizing your pricing communication and positioning based on customer value and benefits is also beneficial.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?