PRICE SENSITIVITY MEASUREMENT (PSM) AND PSMplus

OPTIMIZING PRICE STRATEGY WITH THE VAN WESTENDORP MODEL

The Price Sensitivity Measurement (PSM) is a method for gauging consumer price expectation that has been proven over many years. It identifies in a reliable way the price range within which the highest expectable consumer acceptance lies – usually for products or services already established in the market. A PSM analysis could be the method of choice when a price increase is planned or if comparing with competitors’ products.

The PSM does not only deliver the price range that mirrors the price-value sensitivity of consumers in a certain category. It also analyzes the optimal price which can be an important indicator for a pricing strategy. In order to furnish this data consumers are asked to state prices that they find either too low or too high for a product or service. The results a presented graphically and include thresholds for low and high prices, respectively, as well as the optimal price.

But the PSM is not just useful for price optimization of an existing product. The analysis can also help to determine a price for a newly developed product in an existing category. The results can be used to create an aggressive price policy for market entry or to maximize the price of an existing product.

The survey is easy and entertaining for respondents. They are asked to state four price points for every product. Prices fall into the following categories: The price, which the respondent thinks is …

a. … so expensive that a product / service will not be bought
b. … expensive, but still the product / service is taken into consideration
c. … acceptable, so that purchase is a bargain
d. … so cheap that the quality of the product / service is doubtful and will therefore not be bought.

OPTIMAL PRICE AND REAGULAR PRICE

All answers are aggregated and rendered graphically as curves. The intersections of the curves show both the acceptable price range and the optimal price point. The Optimal Price Point (OPP) is the intersection of the curves “too expensive” (a) and “so cheap” (d). In the example below (Graphic 1) the OPP is at €4.30. At this point there are as many people regarding the product as either too expensive or too cheap.

The perceived average price of the category, also called Indifference Price Point (IPP) is the intersection of the curves “expensive” (b) and “acceptable” (c), in the example €4.75. At this price as many people regard the product as expensive or acceptable, respectively.

PRICE LIMITS

In order to find the upper and lower limit of the acceptable price range, respectively, another presentation is chosen. To do this, the curves of questions b and c are inverted, i.e. shown inverted. Thus “expensive” becomes “not expensive”: This curve now shows the percentage of the sample that does not regard the price as expensive for each price point. Similarly, the “acceptable” curve is inverted to become “no longer acceptable”: This curve shows the percentage of respondents at each price point that no longer see the price as acceptable (see Graphic 2).

The intersection of the curves “too cheap” (d) and “no longer acceptable” (c inverted) marks the lower limit of the acceptable price range. The intersection is defined as the Point of Marginal Cheapness (PMC); below this price more sales volume would be lost than gained because product quality would be questioned. This price can be used as an orientation for entry of a market with an aggressive price policy. In our example this price is at €3.75 (Graphic 2).

In analogy to the above, the intersection of the curves “too expensive” (a) and “not expensive” (B inverted) is the upper limit of the acceptable price range. This price is called Point of Marginal Expensiveness (PME); at this point an equal number of people regard the price either as too expensive or not expensive, respectively. Beyond this point more consumers will perceive the price as too high and doubt the price-value ratio. Therefore, as a rule, the price should not be set higher than this. Quite often, the category leader’s price is in this region.

CERTAIN AND POSSIBLE BUYERS

Another dimension of the PSM is the identification of certain and possible buyers. A respondent is a certain buyer in the range between the perceived “acceptable” price and the “expensive” price where the product is still considered.

The very same person becomes a possible buyer if the price lies between the prices the respondent perceives as too expensive or too cheap. The result of the complete sample is illustrated in a diagram (see Graphic 3).

COMPETITIVE SITUATION, MARKET DYNAMICS AND CONSUMER ENGAGEMENT

When using the PSM it is important to keep in mind that identified price ranges and price points are irrespective of the competitive situation. In other words, the PSM is based on the (often false) assumption that the tested product or service is the only one in its category. However, since usually there are several providers active in the market, these competitors will also attract certain and possible buyers. Therefore, all recommendations resulting from a PSM should always be coordinated with the pricing strategy, in order to warrant the highest success possible.

Furthermore, it should be noted that the standardized version of the PSM neither measures nor considers the engagement of the consumer. It is therefore unknown how familiar the respondent is with the product, how intensively he or she uses it, or which influence brand and performance of the product have on price sensibility. In order to take these important factors into consideration we have developed the PSM further to PSMPlus. Read more about it on page 2.