When it comes to pricing research, there are a few big names in the game. One of which is the Dutch economist, Peter Van Westendorp. The premise of a Van Westendorp model is simple, building upon four pricing questions:
1. At what price would you consider the product to be so expensive that you would not consider buying it?
(Too expensive).
2. At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap).
3. At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive).
4. At what price would you consider the product to be a bargain – a great buy for the money? (Cheap).
Setting aside for now the potential difficulty in answering these questions for new or unfamiliar product categories (which can be mediated by showing priced competitors as a reference point, or by setting limits on the price range), these four questions alone can provide a sense of price sensitivity. More importantly, this information can inform how to price a product in market.
The first two points, too expensive and too cheap, provide the outer limits for a feasible price; a $9 pair of jeans is just as big of a turn off as a $250 pair for most people. The Van Westendorp model defines the Optimal Price as somewhere in between. Specifically, at the point where an equal number of respondents are priced out on both the low and high ends (proportion of “too expensive” at a price equals the proportion of “too cheap”).
To those with less pricing research under their belts, that might sound like a round-about way to get at an answer. While the Van Westendorp model includes a neat chart of curves that have an air of economist’s authority, with inverted curves and labeled intersections, there is a clearer way to cut to the chase.
The inner two price points, cheap and expensive, are where the real findings lie. Between these points, the range of prices can be defined as “reasonable.” A curve that shows the percentage of respondents who consider a price “reasonable” at each price interval is much simpler for a non-economist to decipher. The best price to move forward with in market is usually at or close to the price that receives the highest “reasonable” rating. The steepness of the drop-off in agreement around that price gives a sense of how much wiggle room that reference point has. If 70% of people think that $50 for jeans is reasonable, which is more at any other price higher or lower, then that’s an actionable starting point. Simple as that.
The standard Van Westendorp analysis and the Reasonable Price Curve reporting are not at odds with each other. On the contrary, the price findings from the VW curves can serve as valuable reference points overlaid onto the Reasonable Price Curve.
Example of a reasonable price curve with VW optimal price overlay. While the optimal price point from the VW shows a recommendation of $1.47, the reasonable price peaks higher, at $2.00.
The true nuances of price sensitivity require more than just a single metric of reporting, and more advanced approaches may be better suited for certain product types. But as we see often in research and in everyday life, sometimes the simplest delivery is the best received.
Lisa Shaffer is Senior Marketing Science Specialist at RTi.