Determining the best price for a product or service is a common marketing research question. I usually start my conversation with a client asking whether their product has all of its features set or if they also need to test a range of features other than price. If they are testing variable features in addition to price, we start to talk about conjoint (see here for a video on the current state of affairs in conjoint). However, if they tell me that their product features are set and they just want to look at price, one of the things we’ll likely discuss is the van Westendorp Price Sensitivity Meter (let’s just call it VW).
I was recently corresponding with a colleague (Dave Lyon of Aurora Market Modeling) and the discussions led me to look back at the original VW paper (Peter H. van Westendorp (1976), “NSS – Price Sensitivity Meter (PSM) – A New Approach to Consumer Perception of Prices,” in Venice Congress Main Sessions. Amsterdam: European Marketing Research Society (ESOMAR), 139-167.) In my conversations with Dave, one of the issues that arose was the way many modern researchers calculate the point of marginal cheapness. Are most researchers incorrectly calculating VW’s outputs? What might van Westendorp himself say about this? How about a little background before going into this point?
In the VW technique, Respondents are asked 4 key questions related to their price expectations for a product or service:
- Price at which product/service would be a bargain
- Price at which it would start to get expensive
- Price at which it would be so cheap that quality would be doubted
- Price at which it is too expensive to consider
These 4 questions are often referred to as: “cheap”, “expensive”, “too cheap”, and “too expensive”.
What is the Output?
VW gives us two “central” points:
- The indifference price point (IDP)
- Represents the (median) “normal” price in the market or the price of a market leader.
- The optimal price point (OPP)
- The “sweet spot” where the number of people who find the price acceptable is maximized, and resistance to price changes is minimized
And top and bottom “range” numbers:
- The point of marginal cheapness (MGP)
- Marks the low end of the range of acceptable prices
- The point of marginal expensiveness (MDP)
- Marks the high end of the range of acceptable prices
How Do I Get the Lines to Cross?
- The expensive and too expensive lines represent increasing cumulative frequency as price increases (i.e., the higher the price goes, the more people think it is expensive)
- For the cheap and too cheap lines, however, they need to be inverted, so that as price goes up we’re showing the reducing cumulative frequency (i.e., the higher the price goes, the fewer people think it is cheap). The charts below show this inversion.
So, What’s the Issue?
Well, the central points are fine – IDP is where cheap and expensive cross and OPP is where too cheap and too expensive cross.
However, somewhere along the line, the way that the range numbers are calculated changed from VW’s original paper. Today, here’s how’s it’s commonly done:
- Point of marginal cheapness (MGP): the point where too cheap crosses expensive
- Point of marginal expensiveness (MDP): the point where too expensive crosses cheap
Now, here’s what VW actually said. First, you take the cheap and expensive lines and invert them. He called these new lines “not cheap” and “not expensive”. And here’s how the ranges are derived:
- Point of marginal cheapness (MGP): the point where too cheap crosses not cheap
- Point of marginal expensiveness (MDP): the point where too expensive crosses not expensive
And here’s what the new graph looks like:
Let’s look a little closer at what VW says about these points. He states, “At the point of marginal cheapness a price is given where the number of people which experiences a product as “too cheap” is larger than the number which experiences it merely as cheap.” Basically, he’s saying, below this point you’re in trouble because people will think whatever you’re selling has gone past cheap to too cheap. Same thing with the point of marginal expensiveness: VW describes it as the point where, “…the number of people experiencing the product as “too expensive” is larger than the number of those experiencing the product as merely expensive.” Get it? The product has gone past the point of expensive and is now too expensive.
As an aside, it looks like VW himself may have fumbled the words a bit. Where he says, “At the point of marginal cheapness a price is given where the number of people which experiences a product as “too cheap” is larger than the number which experiences it merely as cheap”, he should really be saying “…is the same as…”. And where he says, “…the number of people experiencing the product as “too expensive” is larger than the number of those experiencing the product as merely expensive”, he should again by saying, “…is the same as…”. It’s really about where the curves cross. Dave and I exchanged emails about this point, and although it might open another can of worms, we thought it best to at least point out. Now, back to the point…
If we look at the modern way of calculating these points, sure the too cheap line is involved in the point of marginal cheapness, and the too expensive line is involved in the point of marginal expensiveness, but why are they crossing expensive and cheap, respectively? Is the low end where a product appears too cheap more than it does expensive? And the high end where a product appears too expensive more than it does cheap? It just seems to make a lot more sense that the lower end of the range is where the product has moved beyond cheap to too cheap, and the upper end where it has moved beyond expensive to too expensive.
What Should We Care?
Let’s see how the numbers turn out using the data above.
|Commonly used method||125||170|
|VW’s actual method||90||215|
And here’s a chart showing all six possible lines and where the correct and incorrect values fall. I know it’s a pretty busy chart, but it clearly shows how far off things are.
Note that in both cases the OPP is 145 and the IDP is 160. What we find in the lower and upper bounds is a wider range when using VW’s actual method. So what? I’m currently working on another paper to dive deeper into this issue, but one main point is that VW is a “blunt instrument”, and looking beyond single point answers to ranges better represents what we can expect to get out of VW. So, we’d better calculate these ranges correctly and in a way that our clients can understand.