The Van Westen what…? One of the most common reasons for commissioning market research is the attempt to determine an optimal price point for a new product or new service. With a number of different price elasticity models available to researchers, the Bunker took some time today to explain this Van Westendorp pricing model and how it might answer some of your pricing questions.
The Van Westendorp pricing model extricates a perceived value of your product or service from consumers participating in the market research study. The analysis of the model provides an Optimal Price Point and an Optimal Price Range for the product or service. This is acquired through a set of four questions asked to the respondent:
- At what price is the product so cheap that the product quality is questionable? Too Inexpensive
- At what price is the product a bargain? Inexpensive
- At what price does the product begin to seem too expensive? Expensive
- At what price is the product too expensive to consider? Too Expensive
Price points are defined to allow the respondent aided choices – $5, $10, $15, etc. These ranges should be of equal distance apart from one another. As is the case with a lot of market research models, assumptions and studies – these are very perceptual questions. What one respondent views as a bargain can be completely different from what another person views as a bargain. Oftentimes, the Bunker suggests that this Van Westendorp questions series is supported by an unaided question of suggested price. It also helps to ask unaided questions about the respondent’s decision-making process behind determining “value.” Questions such as “what are you considering when you determine value of a product” and “how likely are you to purchase this product based on your suggested price?” This will give the research a little more of a foundation to back the pricing elasticity model. Knowing what affects the perception of value is arguably more important than knowing the value of the product/service itself.
Based on the four standard questions asked above, here is an example of what the graphical representation would look like:
The Optimal Price Point (OPP) is the place on the graph that too inexpensive crosses too expensive. The Optimal Price Range/Band is the area in the graph between the PMC and PME. The Point of Marginal Cheapness – PMC – is where too inexpensive crosses expensive. Whereas the Point of Marginal Expensiveness – PME – is where inexpensive crosses too expensive. The PMC is the threshold where the product becomes cheap and the PME is the threshold where the product becomes expensive.
This pricing elasticity model helps guide clients in determining an appropriate price for their product or service, and the Van Westendorp model is a tried and true method to obtain that pertinent information.
Model screen cap taken from: http://home.earthlink.net/~statmanz/papers/vanWes.gif