The dilemma is one that’s familiar to most retailers: how can we change our prices without putting customers off our product? Raise prices too high, and customers might think they’re not getting value for money. Drop them too low, and they might think the product is cheaply made. What, then, are the range of acceptable prices for any given product? The good news – there is a simple methodology you can use to identify the optimal price point for your product, as well as the upper and lower limits. And even better, you can easily understand what the optimum price for your product should be with SurveyMonkey’s Price Sensitivity solution – without having to do a single calculation.
Originally developed by Dutch economist Peter Van Westendorp in 1976, the Van Westendorp Price Sensitivity Meter is a simple but powerful tool that helps you to identify the series of price points which are psychologically critical to your audience. It is a series of survey questions that captures your customers’ price sensitivity, their purchasing power and thought processes – and crucially, how much they are willing to pay for a specific product. The Van Westendorp questions essentially capture customer interest if the price rises or falls – helping you to pinpoint the optimal price point for your product or service. The model is so powerful that over the past three decades, it has become one of the most popular and widely used pricing strategy techniques in the market research industry.
If you want to measure how sensitive your customers are to price changes, there are a few established techniques. However, there are three main scenarios where a Van Westendorp analysis will be especially useful to you:
Even if you are not planning any significant changes in the future, like launching a new product or switching out product features, a Van Westerndorp analysis can yield valuable insight into how to further increase sales, or how to reach profit goals.
Although its insights are powerful, Van Westendorp is simple to execute. It consists of four predetermined questions which help you to collect data on price perceptions in an unbiased way. Unlike other price sensitivity analyses, this approach helps you to evaluate a range of prices in one go – saving time, while yielding actionable insight.
The four questions asked in the Van Westendorp price sensitivity meter are:
For any specific product – even those that are already low price - customers usually hold a floor price, or lowest acceptable price, in their mind. Drop your price below this level, and customers’ suspicions about the quality of your product will be piqued. This first question will help you identify the price at which customers think your product is too cheap.
Everyone loves a bargain. And, some customers are more deal-prone than others. This question helps you to pinpoint the price at which your customers believe they’re getting a great deal. This is invaluable information, and if you’re already tracking competitors’ prices, it can help you gain a price advantage over rival’s products.
This question helps you identify upper price points which are still viable – but which might need to be accompanied by careful advertising and other promotional techniques in order to convert interest into sales.
The final question in the Van Westendorp price sensitivity survey is designed to help you discover the ceiling price for your product – the price above which sales are likely to drastically fall off.
Using SurveyMonkey’s pre-built template, a brief survey can be administered to a target audience in a matter of minutes. You can also customize the questions to meet your specific needs.
For example, if your product is very new, and you have little knowledge of consumer price perceptions, you might prefer an open-ended approach, whereby you ask the audience to enter any price they see fit. Alternatively, if you already have some idea of what your acceptable price range is, you might use a scale that captures both ends of a known price spectrum. And, if your product has not yet launched, or is unknown to the market, you can even add rich media like images or videos so that your audience has a good understanding of what your product looks like. The data obtained from respondents can also be analyzed quickly using SurveyMonkey’s in-built analytic tools.
By identifying the price points that consumers perceive to be expensive, expensive/on the high side, cheap/good value, or too cheap, the Van Westendorp price sensitivity meter will generate for you an acceptable range of prices for your target market. It is common to plot all four of the data points onto a Price Map where the x axis displays prices and the y axis represents the cumulative percentage of respondents who selected each price point. Plotting your data points on a graph like this will allow you to visually depict the range of acceptable prices for your specific market. In order to plot a Price Map there are two steps:
By interpreting the intersections of the data points on your Price Map, you should be able to identify the range of prices acceptable to your market, and crucially: obtain an accurate estimate of your ideal price. There are four main price points you should be particularly interested in: the point of marginal cheapness, the point of marginal expensiveness, the range of acceptable pricing and the indifference price point.
The point of marginal cheapness is the price at which you risk losing the majority of sales because customers perceive that the product is low in quality. It is found by observing where the data points relating to Q1 (Too Cheap) intersect with the inverse of Q2 (Cheap/Good Value). While some customers may still be willing to buy below this price point, the number of sales that would be gained from those seeking to land a deal will be outweighed by the number of sales lost.
The point of marginal expensiveness is the price point above which your customers begin to lose interest in buying. It is found where Q2 (Cheap/Good Value) and Q4 (Too Expensive) intersect with one another. Above this point, while some customers may not be concerned about price, most customers feel that the product is too expensive compared to how much value they derive from it.
The point of marginal cheapness and the point of marginal expensiveness represent the upper and lower limits that your customers are willing to tolerate or that they would expect to pay. This is called the range of acceptable pricing.
The point at which the proportion of customers who believe that the price is becoming too expensive is the equivalent to the proportion of customers who feel the price is a bargain. At this point, most customers are indifferent to the price. A common interpretation of the indifference price point is that it is the normal price for your product. If you choose to price your product below this point, you stand to lose revenues. But, setting prices above this point will cause sales to decline.
The indifference price point is one possible price point for your product, but it may not necessarily be the best. At the optimum price point or OPP, an equal percentage of respondents believe that the price is either too expensive or too cheap. This is the sweet spot: the point at which the maximum number of respondents find the price acceptable, and where resistance to minor changes in price are minimized. At this intersection, maximum sales can be realized, making it the best possible price for your product.
As we’ve mentioned, the Van Westendorp model is not the only way you can capture price sensitivity. So why is it so popular? The simple answer is that it has many advantages and very few limitations. Key advantages of those approach are:
Simple to use. With the Van Westendorp approach, you don’t need to waste time in survey development, because the questions are already prepared for you. And, using Survey Monkey’s ready-made template, you can be ready to capture customer price perceptions in just minutes.
Get direct input from customers. Customers are usually able to provide accurate insight into their perceptions of your prices, making the Van Westendorp price sensitivity analysis a powerful technique. Don’t forget, however, that gathering accurate price perceptions assumes that the respondents you are surveying understand your product – as well as the broader competitive landscape. If you gather price data from customers who are less familiar, your data will be less useful. That’s why it's vital to administer the survey to a known, highly targeted audience – that’s where SurveyMonkey Audience comes in.
Can be used with segmented markets. Likely, your products and services are targeted at not just one market, but a few market segments. The Van Westendorp survey questions can be combined with demographic or other information to find optimal price points for different market segments.
The fun doesn’t stop there. By extending the questions asked in the Van Westendorp survey, you can ask respondents to elaborate on their reasons for selecting different price points, or you could pose supplementary questions about purchasing intentions. For example, after each of the main questions, you might ask:
The answers obtained from these questions can be useful in translating the data yielded from the survey into demand forecasts. By simply dividing the number of people who say that they are likely to buy by the number of people who took the survey, you can predict sales at key price points. If this sounds too complex, our expert market research team can conduct pricing analysis to help you gather data from a tailored, real-life audience, helping you to narrow down the best possible price for your product and to reach your sales goals.
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