Pricing Strategy: Price Sensitivity Meter Analysis

There are multiple ways to come up with pricing strategy and Van Westendorp Price Sensitivity Meter model is one of the quantitative methods to find “Willingness to Pay” by a customer. As the name suggests, this analysis is based on customer’s feedback and their expectation regarding the value of the product.

Step 1. Collect the data

Conduct a survey to get the pulse of the users for these 4 questions.

• At what monthly price is this way too expensive that you would never consider purchasing it?
• At what monthly price is this starting to get expensive, but you’d still consider purchasing it?
• At what monthly price is this a really good deal? (You’d buy it right away.)
• At what monthly price is this way too cheap that you’d question the quality of it?

Cadence should be taken care in the text while framing the questions. For all the above questions, we need to ask the questions specifically for monthly price, else we might get wrong data due to ambiguity.

From the survey, data looks something like this -

Survey Data for Price Sensitivity Meter Analysis

Step 2. Validate the data

Validate the data to make sure we take correct data points from each respondent. In Excel, you can create your formula like this:

IF(AND(A2>=B2, B2 >= C2, C2 >= D2), “PASS”, “FAIL”)

Validate the data

Step 3. Process the data

Create your buckets based on the data. If the data is too nuanced, you can create the bucket size as 5 and if the data is too varied, you can create the bucket size as 50. Use Excel Histogram tool to create frequency distribution of data for each question for our user-defined buckets.

Now, compute Cumulative Frequency from the above processed data and it should look in this format.

Process the data

For some survey questions we need derived data points. Create inverse Cumulative Frequency for Expensive data points as Not Expensive, for Not Cheap(Bargain) data points as Cheap and for Too Cheap.

Step 4. Plot the graph

Plot the graph for all the data points and label as below

• Point of Marginal Cheapness(PMC) = lower bound of an acceptable price range = intersection of Too Cheap and Expensive lines
• Point of Marginal Expensiveness(PME) = upper bound of an acceptable price range = intersection of Too Expensive and Cheap lines
• Indifference Price Point (IPP) = intersection of Expensive and Cheap lines
• Optimal Price Point (OPP) = intersection of Too Cheap and Too Expensive lines

Price Sensitivity Meter

From the above analysis, acceptable price range for our product is $140 - $170 per month.

Reference: Wikipedia