How much would you pay for that?
It’s a simple but powerful question businesses have used for years to conduct market research. While it’s effective and gives corporations a target price for their goods and services, it doesn’t go very far in remaining competitive in today’s marketplace, with today’s consumer.
Enter the Van Westendorp Pricing Model. The Van Westendorp takes the all-too-common question above (known as the Willingness to Pay question) and digs deeper. This newer model revolves around four key questions that expand upon a customer’s willingness to pay and provide businesses with more actionable data.
This blog will act as your guide into the Van Westendorp pricing model. We’ll walk through the primary questions that make up this price sensitivity meter, the history behind it, its advantages and disadvantages, and how to use it most effectively.
What is the Van Westendorp Pricing Model?
The Van Westendorp Price Sensitivity Meter (PSM contains four questions. After being presented with a description of the product or service, respondents are shown a scale of prices and then asked:
- At what price on this scale would you consider the product a good value? [“Cheap”]
- At what price would you say the product is beginning to get expensive, but you would still consider buying it? [“Expensive”]
- At what price on this scale would the product be so expensive that you would never consider it? [“Too Expensive”]
- At what price on this scale would the product be so inexpensive that you would doubt its quality? [“Too Cheap”]
When these questions are administered on paper, up to 20% of the responses have to be discarded for failing validation. We can chalk this up to human error. To prevent this phenomenon when administering the Van Westendorp online, make certain that the following pricing hierarchy holds true:
- Expensive > Cheap
- Too Expensive > Expensive
- Too Cheap < Cheap
The basic Willingness to Pay question produces unnatural results in that it returns low price points, which everyone is willing to pay. In the real world, price is a signal of quality, and there are, in fact, low prices that are too low to be acceptable.
Would you buy a steak dinner if it costs $5 or a new car if it costs $5,000? While I would be okay with eating a Grade E steak dinner in a car powered by a go-kart engine, most consumers have more discerning tastes. They inherently understand that there’s a “low-end” price for goods and services. The Van Westendorp price sensitivity meter helps estimate this low end through its “Too Cheap” question.
If you’re struggling with pricing research, I encourage you to attend David’s workshop at the Applied Research Methods conference – where you can also attend my classes on Panel & Community Management and Pragmatic Social Media Research.
History of the Westendorp
The Van Westendorp pricing model has its roots in the 1970s when Dutch economist Peter Van Westendorp developed it to determine optimal product pricing strategies. He had the key insight that by asking consumers four simple questions regarding the lowest and highest prices they would consider for a product, one could gauge their price norms and price sensitivities. By graphing the cumulative percentage responses to these questions, an acceptable price range emerges in the middle where consumers view the price as reasonable.
This simple and intuitive way to incorporate consumer feedback into optimal pricing decisions would have an enduring impact. Companies have embraced the wisdom of setting prices based on consumer perceptions.
Despite newer techniques like conjoint analysis, the Van Westendorp price sensitivity meter’s versatility and ease of use keep this strategy relevant. While not as complex, it remains popular for gaining quick and actionable price appropriateness data that can inform pricing strategy and get products to market at competitive speeds.
How the Van Westendorp Price Sensitivity Meter is Used
When it comes to the Van Westendorp pricing model, an essential part of efficient survey management is ensuring you use it in scenarios where it can thrive. Here are five primary real-world methods for using this PSM.
1. Pricing Research Surveys
The standard way the model is used is by including its four defining pricing questions on broader market research surveys. The questions ask respondents at what prices a product: is a bargain, becomes expensive, is too expensive, and becomes too cheap.
2. Charting Price Acceptability Ranges
Responses across groups of potential customers are aggregated, and the “too cheap” and “too expensive” cumulative percentages are charted to identify a price acceptability range where pricing aligns with consumer expectations.
3. Assessing Consumer Price Anchor Points
Analyzing responses can reveal price “anchor points” in consumers’ minds where prices become unacceptable. This shows intrinsic price norms and can prevent businesses from overpricing or underpricing themselves out of the market.
4. Comparing Segments and Products
Administering uniform Van Westendorp pricing questions for different customer groups or products allows for comparisons of optimal pricing ranges and price sensitivities.
5. Pricing Optimization Over Time
Conducting periodic surveys allows companies to adjust pricing over time according to evolving consumer sentiment rather than static assumptions. In practice, the Van Westendorp pricing methodology offers an easy-to-use, survey-based approach to gauge consumer price perceptions that aid data-backed pricing decisions rather than guesswork.
What are the advantages and disadvantages of Van Westendorp?
Here are some of the main advantages and disadvantages of the Van Westendorp pricing model.
Advantages
- Simple and easy to understand – Requires asking just four questions and basic graphing to arrive at results.
- Data-driven pricing decisions – Results derive directly from consumer price perceptions rather than assumptions.
- Flexible and versatile – The model can be applied to almost any product or service in B2B and B2C contexts with reliable results.
- Low cost – Unlike more complex analysis, it is inexpensive to conduct Van Westendorp surveys, even across large consumer segments.
- Quick insights – No extensive analytics needed. Provides firms with actionable optimal prices in a short timeframe.
Disadvantages
- Less granularity – Only identifies an acceptable price range, not a precise optimal price point.
- Risk of bias – Results can steer towards customer anchoring biases around pricing rather than actual willing-to-pay.
- Less contextual – Framework does not account for competitors, demand curves, price elasticity, or other market variables.
- Ongoing reliance – Continually conduct new surveys as customer perceptions evolve.
Using the Price Sensitivity Meter Effectively
When analyzing the results from these questions, look for prices in the normal range (between Cheap and Expensive) for as many people as possible. If that is too narrow, look for prices in the acceptable range (between Too Cheap and Too Expensive) for as many as possible.
The Van Westendorp question bank offers the illusion of rigor while suffering from many of the same problems as the fundamental Willingness to Pay question. Respondents tend to lowball their answers, and those answers are not likely to reflect actual behavior.
As with Willingness to Pay, this technique is best used as input to further pricing research, and a small sample size is sufficient. As David Lyon writes in “’ The Price is Right (Or Is It?),’ PSM is used far more widely, and its results are taken far more literally than they should be.”
Utilizing the Van Westendorp Pricing Model for Your Business
The Van Westendorp pricing model can provide organizations insightful data into their audience’s pricing threshold. The key to maximizing the effectiveness of this PM is to ensure you use the survey in the correct context and analyze the data accurately.
Don’t worry if this sounds overwhelming. Our team of customer experience experts at Verint is here to help. Contact us today and let us show you how we use cutting-edge technology and software to improve your retail choreography – transforming and deepening your relationships with your customers.