The van Westendorp Price Sensitivity Meter – Are We Using It Incorrectly?

In: main|Pricing|van Westendorp

2 Aug 2011

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?

The Questions

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.

IDP and OPP

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

MDP and MGP

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:
MGP and MDP new

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.

MGP MDP
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.
van Westendorp 6 lines
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.

12 Responses to The van Westendorp Price Sensitivity Meter – Are We Using It Incorrectly?

Avatar

Mike Donatello

August 16th, 2011 at 8:31 am

Nico — Great post! I’m so glad I found this. I made the same point in my dissertation lit review.

Avatar

Stuart Drucker

September 12th, 2011 at 4:15 pm

Nico – Thanks for posting this, and discussing something that I’ve been struggling with since I started my practice in 1993 (the same year that the US West paper on VW extensions came out at the A/R/T forum). The struggling part is “knowing” that you’re correct – as per Dave’s reasoning – and having to convince clients that what they think is “right” really is a misinterpretation.

If I didn’t have economics training in school it wouldn’t have occured to me either. However, from an economist’s POV, the corrrect way is more intuitive and logical. The problem is that somewhere along the line, the lack of access to the original Peter vW paper and his confusing explanation (I’ve wondered if something got lost in his English), and the exposure of the “wrong way” being so widespread made it “right” by acclamation. We as an industry need more education about the theory behind what we analyze. Keep up the good work!

Stuart Drucker
Drucker Analytics, Inc.

Avatar

admin

September 15th, 2011 at 10:42 am

Thanks for the comments. I envision a “revamping” of VW happening over time. First, getting things right per the original paper, then exploring what Dave Lyon and I have started calling the “normal proportion method”. Hopefully, as more gets written, the broader community will come along and start to view the tool more accurately.

Regards, Nico

Avatar

Philip Moore

December 15th, 2011 at 8:23 am

Nico,

Great post. I learned the VW method (the right way) from Bill Svenson at Market Decisions Corp when I started my MR career back in the mid 90s. I didn’t realize until I read your post that MR vendors had fallen into this practice. Thanks for the heads up.

Avatar

Muriel Esposito

July 10th, 2012 at 2:22 am

Thank you for outlining the errors of the modern interpretation – I have been trying to reconcile why there seemed to be two methods of calculating a price range, one (today’s) producing a narrower price range than the other (original). The way you have explained how it works, and importantly, what it means, was exactly what I needed. Thanks again.

Avatar

Dale Gilliam

August 28th, 2012 at 12:54 pm

It makes so much sense to me now! Thanks Nico! There are a number of resources out there that are actually teaching it wrong. I tend to look for newer resources when researching methods — in case something has changed (for the better) since original publication. But your post reminds me to go back to the source as well.

Avatar

jyoti

June 4th, 2013 at 9:21 pm

Need to know if PSm is to be asked in comparison to the comptetiion with thier specs and product features and price or only the test product features. and what benefits both of these have? any difference in the outputs?

Avatar

admin

June 6th, 2013 at 3:41 pm

The minute you start to talk about comparison to a competitive product – different brand, different features, etc., I start thinking about using conjoint. I don’t know of any research on using VW in the way you describe. Good luck!

Avatar

Shelly

July 22nd, 2013 at 11:18 am

Any chance you could explain how you actually calculate those intersection values from a programming/excel function stand point? Its easy to view the approximate, but I want to know how to get the intersection point values formulaicly.

Thanks,
Shelly

Avatar

admin

July 22nd, 2013 at 11:31 am

Hi Shelly,

Unfortunately, the original VW article doesn’t talk about how to calculate the intersection values formulaicly. I’m sure that someone has written an Excel macro to do this, however, given that I don’t personally put much value in the intersection method, I haven’t taken the time to do so. It’s really not that precise a technique, so I don’t advise taking things beyond the “approximate”.

Good luck, Nico

Avatar

John Pendleton

January 16th, 2014 at 2:06 pm

A very useful discussion, and glad to see my colleagues Stuart and Philip in concurrence!

Avatar

Arif Hussain

March 13th, 2014 at 6:40 am

Great Post! Clarified my understanding of PSM approach. Thank you.

Comment Form