When you are launching a product and need to know what price range customers find reasonable, before you test features or competitors, the Van Westendorp Price Sensitivity Meter (PSM) is a quick place to start.
Introduced by Dutch economist Peter van Westendorp in 1976, it asks respondents for four prices rather than showing them one. The result is not a single price but an acceptable price range: a floor below which buyers start to doubt quality, and a ceiling above which they won't buy.
The four questions
After reading a description of the product, each respondent gives four prices:
Too cheap: "At what price would this be so cheap that you would start to question its quality?"
A bargain: "At what price would this be a bargain, a great buy for the money?"
Getting expensive: "At what price would this start to get expensive, so that you would have to think about buying it?"
Too expensive: "At what price would this be so expensive that you would not consider buying it?"
The answers must rise in order: too cheap < bargain < getting expensive < too expensive.
Reading the four curves
The answers are turned into four cumulative curves, each showing the share of respondents who hold a view at a given price:
Too cheap (falls as price rises): the share who think this price or higher is still too cheap.
Not a bargain (rises): the share for whom this price is no longer a bargain.
Not expensive (falls): the share for whom this price is not yet getting expensive.
Too expensive (rises): the share who think this price or lower is already too expensive.
Where the curves cross, they mark four price points:
Point of marginal cheapness (the floor): where too cheap crosses not a bargain. Below it, more people doubt the quality than are attracted by the low price.
Point of marginal expensiveness (the ceiling): where not expensive crosses too expensive. Above it, resistance grows quickly. The range between the floor and the ceiling is the acceptable price range.
Indifference price point: where not a bargain crosses not expensive. As many people see the product as cheap as see it as expensive; this is often close to the price buyers consider normal for the category.
Optimal price point: where too cheap crosses too expensive. The fewest people reject the product as either suspiciously cheap or far too expensive.
The Newton-Miller-Smith extension
A known weakness of the original method is that an "acceptable" price does not tell you whether anyone will buy.
Newton, Miller and Smith (1993) added two purchase-intent questions after the four prices: how likely the respondent would be to buy at their own "bargain" price, and at their own "getting expensive" price. Converting those answers into purchase probabilities gives a demand curve across the price range, and from it a revenue curve.
When Van Westendorp is the wrong tool
No competitors in view. Respondents judge your product alone. With a cheaper rival on the shelf next to it, the prices people accept in real life can be lower.
One fixed product. It cannot tell you what a feature upgrade, a bigger pack or a longer warranty is worth. For those trade-offs, use choice-based conjoint.
Unfamiliar categories. If people have no reference point for what something should cost, their four answers scatter widely and the curves become hard to read.
How Ordeen runs Van Westendorp
In Ordeen, Van Westendorp is one of six study methods, alongside conjoint and Gabor-Granger.
Intervals on all four price points. With a modest sample, the crossing points can move noticeably. Ordeen resamples the respondents 1,000 times and reports a 95% bootstrap interval for each point.
Newton-Miller-Smith on by default. Each respondent's intent at their "bargain" and "getting expensive" prices is converted to a purchase probability (0.70 for "definitely would buy", 0.30 for "probably", 0 otherwise). Their probability is zero at their too-cheap and too-expensive prices and runs in a straight line between those four points. Averaging across respondents gives the demand curve; revenue is price × demand, and the revenue-maximising price comes with a bootstrap interval.
A note on every report that Van Westendorp measures stated price resistance without competing products in view.
Related reading: What is the Gabor-Granger method? · Van Westendorp, Gabor-Granger or conjoint? · What is conjoint analysis?
Sources
van Westendorp, P. H. (1976). NSS Price Sensitivity Meter (PSM): a new approach to study consumer perception of prices. Proceedings of the ESOMAR Congress, Venice.
Newton, D., Miller, J., & Smith, P. (1993). A market acceptance extension to traditional price sensitivity measurement. AMA Advanced Research Techniques Forum.
Alletsee, M. pricesensitivitymeter: Van Westendorp Price Sensitivity Meter Analysis. R package, CRAN.
