In the 1970s, Dutch economist Peter H. van Westendorp  introduced  a  simple method  to assess consumers’ price perception.  It is based on the premise that there is a range of prices bounded bya maximum that a consumer is prepared to spend and a minimum below which credibility is  indoubt.  The Price Sensitivity Meter (sometimes called the Price Sensitivity Measurement) is based on respondents’ answers to four price-related questions.

A simple and easily executable method, the first step  in the  PSM is to ask  respondents  the following four price-related questions:

1.  At what price do you begin to perceive the product as so expensive that you would not consider buying it?  (Too expensive)

2.  At what price do you begin to perceive the product as so inexpensive that you would feel that the quality cannot be very good?  (Too inexpensive)

3.  At what price do you perceive that the product is beginning to get expensive, so thatit is not out of the question, but you would have to give some thought to buying it?(Expensive)

4.  At what price do you perceive the product to be a  bargain  –  a  great buy for  the money?  (Inexpensive)

From responses to these questions, cumulative frequency distributions are derived and plotted.

Interpretation of Results:

• The IPP generally reflects either the median price actually paidby consumers already in the market or the price of the product of a market leader.
• The range of prices between the PMC and PME  is considered the range of acceptable prices. In markets that  are already well established, few competitive products will be priced outside of this range.
• The OPP, according to this method, is the point at which the same number of  respondents indicate that the price is  too  expensive as indicate that the price is too inexpensive.  Manypricing researchers question whether this is the  definitive  optimal  price  for a product. The questions asked itself, force respondents to choose a range  of prices (as opposed to just one) that they consider to be acceptable.
• Unlike discrete choice methods, the PSM does not replicate the actual shopping process.  Instead, it tests respondents’ knowledge of a product’s price levels.  The consequence of this reliance on consumer reference prices is twofold.  First, results will vary depending on respondents’ experience with price levels in the market.  If respondents do not have a good reference price, this method often causes the underestimation of a product’s ability to command a premium price.  Second, results will vary as the market itself changes.
• Underlying the entire method is the concern that the questions directly ask respondents what they would be willing to pay for a product.  Several researchers believe, however, that in order to be more effective, questions should focus on behavior rather than price.  Additionally, these consumer-defined prices may not correspond with the actual range of acceptable product prices.
• Answers to questions used in the PSM do not reflect purchase intent.

Despite the concerns, the PSM remains a simple method; it is both easy to execute and easy to understand.  Although we rarely propose its use and never recommend the PSM as a method for definitively selecting the price for a product, it can be used as a tool for gauging consumers’ price perceptions and expectations.

Earlier Post on Pricing: https://brandalyzer.wordpress.com/2010/10/01/customer-perceived-value-the-base-of-your-pricing-strategy/