Identifying Prices for New Products

The Price Sensitivity Meter (PSM) was developed by the Dutch economist Van Westendorp
in 1976.

The PSM is most suitable for the determination of the price bracket of new products and services. Whilst the PSM can be used in early phases of product development in particular, to reveal price thresholds and to check whether there are enough potential buyers in the targeted price segment, it is somewhat less suitable for precise price recommendations.

The aim of the PSM is to use four questions to determine the acceptable price bracket and eventually to identify an optimum price.

The four questions are as follows, with no adaptation for any specific product:

At what price would you begin to think product is too expensive to consider?

At what price would you begin to think product is so inexpensive that you would question the quality and not consider it?

At what price would you begin to think product is getting expensive, but you still might consder it?

At what price would you think product is a bargain - a great buy for the money?

On the basis of the resulting intersecting points, four price points can be determined:

Optimum price: This is where the consumer’s resistance to purchasing is at its lowest.

Indifferent price: The smaller the difference between this price and the optimum price, the greater the customer’s price sensitivity.

Lower price limit: If the price were set below this threshold, it could harm the company’s image.

Price upper limit: If the price is above this limit, the number of people who see the product as too expensive exceeds the number of those who do not think it is expensive.  

Zoom: The Price Sensivity Meter according to Van Westendorp consists of four questions with which price points can be determined. For the sample product, prices accepted by the respondents range from CHF 6.- to CHF 11.-. The optimum price is therefore CHF 8.-.

For the sample product, the optimum price is CHF 8.-.
Prices accepted by the respondents range from CHF 6.- to CHF 11.-.