How you can to determine the optimal price to charge your customers

Meet Peter Van Westendorp. Who, you say?

Peter Van Westendorp; the Dutch economist. Not a particularly famous name in business circles but someone who had a brilliant idea about pricing.

We all want to find out the optimum price that a customer is willing to pay for our product, service or professional expertise. Right? If we can, we’ll sell more, at a greater profit and grow the business to boot.

Also, we know that if we ask our customers directly what price they think is appropriate for your product, you start playing a game. They’ll try and persuade you that you too expensive every time. The fact is; it’s meanless to ask about pricing directly as the feedback you’ll get will be as useful as a chocolate teapot.

That’s where Van Westendorp comes in. His brilliant concept was to create a Price Sensitivity Meter. This methodology enables businesses to determine, using real-world data (not guesswork), what the optimal price you could charge for your products, services or professional expertise.

Using a series of open questions that closely connect price and quality, his methodology allows you to use practical research techniques such as face-to-face discussions, telephone surveys or online questionnaires, to understand your customer’s sensitivity towards your pricing.

There are four key questions you need to ask.

1.    At what price would you consider the product to be priced so low that you would start to question its quality? (It’s too cheap)

2.    At what price would you consider the product to offer you really good value (It’s a bargain)

3.    At what price would you consider the product is beginning to get expensive and you would have to give some thought to buying it? (It’s getting expensive)

4.    At what price would you consider the product to be so expensive that you wouldn’t consider buying it? (It’s just too expensive)

Once you’re received the feedback, as many respondents the better and certainly well over 30 to give you some degree of confidence, you’ll need to review the data provided and remove the outlying figures. You know the ones where someone’s missed the point or are trying to be funny, like “everything should be free!”

You then need to find out the frequency distributions for the questions and put them in a chart. Don’t worry; there are several online templates to help you do this really quickly.

You can then identify these five characteristics. Bear with me.

Point of Marginal Cheapness (PMC) - This is the price point at which more sales would be lost due to perceived poor quality than people who thought it was great value for money.

Point of Marginal Expensiveness (PME) - This is the price point at which the product is deemed too expensive relative to the value it offers.

Optimal Price Point (OPP) -This is the price point where the percentage of customers who believe the product is too expensive is exactly the same as those who think it’s too cheap.

Indifference Price Point (IPP) - This is the price point where the percentage of customers who believe the product is too expensive is the same who believe it is excellent value for money.

Range of Acceptable Pricing (RAP) - This is the difference between the point of marginal cheapness (PMC) and the point of marginal expensiveness. (PME)

Sounds a bit academic? Well, frankly it is. But it offers practical insights too. Making sense of all this data is crucial. While intuitively you might think the Optimal Price Point is what you should base your price on, your actual price should really reflect the point of marginal expensiveness. That’s the final point at which people will pay without thinking about it too deeply.

So, there you have it. It’s not a panacea though; if you’re selling luxury items where perceived value is not so closely linked to price, it won’t really help. It also takes some time to complete but the benefits often outweigh the hassle. Saying that, it’s one of the best ways of understanding your customer’s willingness to pay. Surely that it’s worth the effort.  

Thank you, Mr Van Westendorp, for your brilliant idea and your contribution to pricing knowledge. Thank you.