Van Westendorp Analysis

Van Westendorp Analysis

Background

  • First proposed in 1976 (van Westendorp 1976)
  • The Price Sensitivity Meter (PSM) has steadily gained in popularity as companies increasingly try to estimate optimal pricing
  • Particularly popular for use in consumer goods and small ticket B2B products
  • Concept is driven by two psychological principles: “Theory of Reasonable Prices”; “Price Signaling Quality”.

Description of How it Works

  • Educate respondent about new product offering
  • Then ask four questions:
    1. At what price would you consider this item to represent a good value?
    2. At what price would you say this item is getting expensive but you would still consider it?
    3. At what price would you say this item is so expensive that you would no longer consider it?
    4. At what price would you say this items is so inexpensive that you would begin to question its quality?
  • Output from the 4 questions generates a demand
    curve that is supposed to calculate the optimum price

Strengths

  • Simplicity of execution
  • Results are never embarrassing or inexplicable because it is based on the “Theory of Reasonable
    Prices”
  • Most useful for highly innovative products for which there is genuine ignorance as to what kinds of reasonable price ranges respondents might generate.

Weaknesses

  • The key weakness is the four questions are too similar to “How much would you pay for this product?”. This typically results in responses being biased and low.

Measures of Predictive Validity

  • Unaware of any published validation in the past 26 years since van Westendorp’s original paper
  • Exceptionally few publications addressing this method at all
  • In 1999, Pricing Solutions Division conducted a study testing three methods of pricing research (i.e. van Westendorp, Price Laddering, Discrete Choice) – the results from the van Westendorp were biased low, underestimating the optimal price by 35%

Our Assessment

  • PSM is used far too frequently and its results are taken much to literally
  • While promising on the surface (i.e. simple, easy to use, and has intuitive appeal) it is frequently ineffective – providing results signifi cantly different from the optimal price (i.e. volume and margin are maximized)
  • Further testing should be done using other research methods (e.g. monadic, discrete choice, etc.) before accepting PSM results

Pricing Theories:

  • “Theory of Reasonable Prices” – assumes buyers can examine an item and formulate a rough notion of what they would expect the item to cost or at least the range into which they would expect it to fall.
  • “Theory of Price Signaling Quality” – assumes that some prices are “too low”, and that buyers will avoid products that are priced too low.