Price Sensitivity Measurement technique plots
Product price vs. Quality perceptions.
By Kenneth M. Travis
Executive Vice President-Director
Plog Research Inc.
Reseda, Calif.
Price Sensitivity Measurement (PSM) is a welcome and important addition to the marketing researcher's arsenal of techniques.
Developed by Dutch economist Peter H. van Westendorp, it examines price perception by determining the levels of consumer resistance over a range of prices that relate to the product's quality perceptions.
Monadic exposure of prices isn't involved, so PSM doesn't require a large respondent sample. Data collection is simple-- only four questions need to be asked- and interviewers and respondents don't need special skills. PSM has been successfully applied to new and existing products, brands, and services.
Psychologists define perception as “a meaningful observation; an immediate or intuitive recognition of a quality.” Price sensitivity is defined by the consumer's perception of the product or brand's value, not absolute price.
Price perception can be divided into several component experiences, such as cheap, expensive, bargain, quality, threshold and prestige. A significant component of price perception is the dynamic nature of prices and, therefore, price sensitivity.
When confronted with different prices within a product category, consumers compare them with a standard or acceptable Price based on their experiences and their spending capabilities and intentions. A price which an affluent consumer would consider cheap might be considered expensive by a low- or, -middle-income consumer.
Consumers do not buy products, services, or brands strictly on the basis of the cheap--expressive experience of Price Perception. Their choice is affected by several components that produce price sensitivity.
The bargain experience occurs when the price of a product compares favorably with the perceived “normal” price of the product. Unlike a cheap price, this is lower than the known, normal price for a given quality.
Price is an important indicator of quality, particularly when it is difficult or impossible for consumers to judge quality in any other way.
The threshold experience refers to the fact that price/demand elasticity is not a smooth continuum. As price passes through specific price levels, or thresholds, demand shifts dramatically. These thresholds tend to occur relative to whole monetary units.
For example, raising a product's price from $4.29 to $4.99 may have little effect on demand, but demand may drop dramatically if the price is increased to $5.01, In this case, the product's price threshold would be about $5.00.
This pattern reflects consumers’ tendency to substitute products at perceived price thresholds, rather than to reduce consumption proportional to the price increase.
Social status or prestige often is an element of price perception. This explains why many consumers prefer products they consider expensive, even when equal-quality alternatives are available.
The dynamic nature of prices must be considered when interpreting the results of price-sensitivity measurement. The optimality of a given price at a given time for example, is affected by the upward trend of prices. This is particularly true in a time of high inflation.
The methodology of PSM defines the absolute threshold range in pricing as being between the price where consumers begin to doubt the quality of a brand and would substitute another brand, and the price which the consumer would regard as too high, prompting substitution.
The PSM technique involves four questions which are answered by referring to a price scale:
-At what price on the scale do you consider the product or service to be cheap?
-At what price on the scale do you consider the product or service to be expensive?
-At what point do you consider the product or service to be too expensive and beyond considering buying?
-At what point do you consider the product or service to be too cheap, so that you question the quality?
Respondents typically work with a scale of 15-30 prices spaced equally apart. For example a 20-point scale might begin at $1.99, then go to $2.09, $2.19, and proceed to $3.99.
Recorded answers are plotted on a graph where low to high prices appear on the horizontal line and percentage of respondents on the vertical line. The cheap and expensive question responses are plotted first and the point where they intersect is the indifference price (IDP).
The IDP represents the point on the price scale where an equal number of respondents regard the price as cheap as consider it expensive. The remaining respondents regard the price as neither cheap nor expensive; this price represents the maximum number of respondents who are indifferent about the price; hence the name.
An inverse relationship exits between indifference and price consciousness. A low-level indifference percentage indicates a high level of price consciousness, while high indifference is characteristic of diffuse price consciousness.
The same procedure is used in graphing the response to the too-expensive and too-cheap questions. The point where those lines intersect is the optimum pricing point (OPP).
The OPP is the price at which an equal number of respondents see the brand as too cheap and too expensive. This price is where price-related purchase resistance to a product, brand, or service is lowest.
The four cumulative distributions are combined on one graph. When the OPP is to the left of the IDP-- that is, at a lower price-- the space in between is called the “stress”, in price consciousness.
Stress is like automobile “sticker shock” in that consumers' perceptions of a normal price is a price that is too high. The greater the separation between the OPP and the IDP, the greater the feeling that the normal price is too high.
A stress situation is likely when prices recently increased in a product category. IDP accurately reflects current prices, and this is particularly true when there is a high level of price consciousness (low level of indifference).
Cheap and expensive cumulative distributions are reversed in the next graph, producing the not-expensive and not-cheap distributions. These arc graphed with the original too--expensive and too-cheap distributions.
The intersection of the not-cheap and too-cheap lines is the point of marginal cheapness (PMC). At this point, the number of people regarding the product as too cheap is the same as those considering it to be expensive, or not cheap.
The point where the same number of people regard the brand as too expensive as regard it as cheap is the point of marginal expensiveness (PME). The range between PMC and PME is the range of acceptable prices (RAP). Unless consumer price consciousness is altered by repositioning or extension of the brand line, pricing outside RAP will not generate more business.
The final step in the PSM technique requires the analyst to reverse the cumulative distributions of consumers' perception of a cheap and an expensive price to produce a not expensive and not-cheap distribution. When combined with the original too-expensive and too-cheap distribution, a range of acceptance prices (RAP) is provided.