Deciding on the pricing strategy for a product is one of the most crucial challenges a brand faces. Apart from having implications on sales and profitability, it also plays an important role in how a brand is perceived by consumers. Price a product too high and you might risk losing customers. Mark it down too low and it may be perceived as poor quality.
How then should brands go about arriving at the sweet, optimal spot? This is where the Van Westendorp Pricing Model can be a useful tool that is simple to execute.
The Van Westendorp Pricing Model is a research method created by economist Peter van Westendorp in the 1970s.
It involves a series of four questions that indirectly measures consumers’ price sensitivity and price perception instead of directly posing the question of how much they are willing to pay.
The Van Westendorp Pricing Model helps estimate an acceptable price range for a particular product or service, and an optimal price point for it.
The Van Westendorp Pricing study is best suited for new products for which there is little to no existing market data for comparable products. This could either be because the product is completely novel or the product offers novel features that sets it apart considerably from competitors to warrant a different pricing strategy. This pricing method allows brands to gauge an acceptable range of prices potential customers are willing to pay.
The Van Westendorp approach also takes into account consumer "psychology" when determining the optimal pricing range. Pricing is not just about what consumers find affordable. Low prices can signal product quality and expensive products often may be considered justifiable, and this approach aims to find price points that resonate with different consumer psychology.
The Van Westendorp Pricing model essentially consists of asking each respondent four main questions :
These four core questions can be asked either as an open-ended question, where respondents fill in a price point that is relevant to them, or a close-ended question, where respondents select from a list of prices for each question.
It is good practice to preface these questions with detailed information about the product so that respondents have some context before providing their price preferences.
One may also choose to add in questions at the start to gauge respondents’ interest in the product category or likelihood to purchase the product so that one can target/filter responses more effectively.
After gathering all the responses from your respondents, the cumulative responses are plotted on a graph and the results can be visualized as below :
The graph consists of four curves, with each representing one of the four core questions. The x-axis represents the unit prices of the product, and the y-axis represents the percentage of respondents who selected each price point.
To get a better understanding of what each curve means, let’s focus on the ‘Too expensive’ curve (in yellow).
Each point on a ‘Too expensive’ curve represents the percentage of respondents that think the price is too expensive at that particular price point. Expectedly, the percentage increases as the price increases because as the price increases, more respondents would find the product or service to be too expensive. The percentage at $7 also takes into account the respondents that indicated a lower price point (e.g. $6, $5, $4 etc) to be too expensive, since, by extension, if they considered a lower price to be too expensive, they would consider $7 to be too expensive as well. This logic applies to each curve on the graph.
Represented by Point A on the graph, it is the intersection of ‘Too cheap’ and ‘Expensive’.
This is the price below which you risk losing the majority of sales because customers perceive that the product is low in quality. While some customers may still be willing to buy below this price point, the sales volume gained from those seeking to score a bargain will be outweighed by the volume that was lost.
Represented by Point B on the graph, it is the intersection of ‘Inexpensive’ and ‘Too expensive’. This is the price where anything else above it is likely to be too expensive for most customers.
Consumers typically have a range of prices that they are willing to pay for a product, and Point A and Point B together give us exactly that. It is the price range in which we should price our product or service.
Represented by Point C on the graph, it is the Intersection of ‘Too cheap’ and ‘Too expensive’.
This is the point at which the maximum number of respondents think that the price is acceptable. If the price is higher than the optimal price point, it means that more respondents would think the price is too expensive and will pose a deterrent to purchase. If the price is lower than the optimal price point, it means that more respondents would think the price is too cheap such that the quality of the product or service is questioned.
Represented by Point D on the graph, it is the intersection of ‘Inexpensive’ and ‘Expensive’. At this price point, it can be said that respondents are indifferent to the price point, as the same number of respondents find it both inexpensive and expensive.
Together, these metrics will be able to provide us with a clearer picture of how we should price our product or service. Knowing the price at which our product or service becomes perceived as ‘too cheap’ is also important as it can impact brand quality and perception. Knowing the price at which our product or service becomes ‘too expensive’ to most is also a good datapoint to have as we do not want to alienate potential customers.
The Van Westendorp Pricing Model was originally created to use open-ended responses, but what we found when we conducted an internal experiment was that the open-ended responses required a lot of manual work to clean the data, and it could also lead to more conflicting responses compared to a close-ended questionnaire. Using open-ended questions also encourages lowballing as respondents are not limited to a certain price range.
At Milieu, we ran an internal experiment to look at the differences in price points when using a close-ended survey with more granular options versus one with less granular options. There are considerable differences depending on the level of granularity used. A survey with less granularity will tend to give you higher price points, while one with more granularity will give you lower price points. Some granularity is recommended, but be mindful so that it does not come at a cost of user experience - that is, having to scroll or look through too wide a range of prices.
If your survey is conducted on a mobile device, it is important to ensure that the options list starts from the middle value instead of the top or bottom value in order to reduce any biases.
Below is an example of a Van Westendorp question being asked with two different scales; one where the default value starts from the middle, and one where the default value starts from the top.
If your survey is conducted on a web device, it’s good to ensure that all the options can be seen at a glance as well.
As mentioned in the above example on water filters, decision makers of the product or service would be ideal as they are likely to be current or future purchasers of the product or service, and would have more information on how your product or service should be priced.
Pricing questions are highly subjective and respondents may give very different answers, so it’s important to get a decent sample size for your study to even out any outliers. Typically, at Milieu, we recommend a sample size of no less than n = 100 but for a pricing study you might want to higher to reduce the margin of error to below 10%. Do check out this article on how to determine the optimal sample size for your survey, if you wish to learn more.
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