Pricing a new product or service can be a daunting challenge for marketers. Priced too high, even a great offering may languish. Priced too low, there is the risk that the margins may be too lean and, just as bad, the perception of quality may suffer.

But a proven tool — Van Westendorp’s Price Sensitivity Meter (PSM) – can remove the guesswork from this marketer’s dilemma.

Introduced by Dutch economist Peter Van Westendorp in 1976, the PSM can be applied to any consumer product or service. It establishes an acceptable consumer price range by surveying a potential market and asking respondents to answer four questions about a specific product or service (as opposed to asking an exact price they would pay):

  • At what price would you consider the product to be so expensive you would not consider buying it?
  • At what price would you consider the product to be priced so low you would feel the quality couldn’t be very good?
  • At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it?
  • At what price would you consider the product to be a bargain—a great buy for the money?

The questions can be asked in a variety of ways – e.g., in person, over the phone, via a paper surveys or, as is increasingly the norm (and highly effective and efficient), through online surveys to a screened panel of research participants.

Values collected for each question are plotted as histograms (e.g. the tracking lines on the accompanying example chart).

The histograms for “Expensive” and “Bargain” are inverted in order to create the intersections required to establish an acceptable price range. On the chart, these are referred to as “Not Expensive” and “Not a Bargain.”

Once the four histograms have been plotted, the intersections provide key pricing information for analysis to determine an acceptable price range. The various data points the PSM reveals is one of its greatest strengths. Every study will turn out differently, and the PSM provides enough indicators to enable a researcher to understand where the best pricing opportunities exist.

If you’d like to learn more about PSM studies – and how we deploy them to our clients’ advantage – we’d love to speak with you.