In the domain of pricing research, the Van Westendorp pricing model, a price sensitivity meter, has historically stood as a beacon, guiding companies to determine optimal price points for their products and services. Developed by Peter Van Westendorp in the 1970s, this model has been celebrated for its simplicity and ease of application, offering valuable insights into consumer behaviour and preferences.

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However, in modern pricing with numerous complexities, there are usually multiple factors to take into account for optimal price setting. Price Sensitivity has several aspects, and Pricing Managers need to identify new drivers to ensure accuracy with time. Hence, it's crucial to know the Van Westendorp price sensitivity meter’s inherent limitations, uncovering its boundaries and potential shortcomings.

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Let’s begin by taking a closer look at how the Van Westendorp price sensitivity meter works to identify optimal prices.

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How Does the Van Westendorp Pricing Model Work to Find Optimal Price?

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Emerging in the early 1970s, the Van Westendorp pricing model was revolutionary in its approach to pricing research. Companies found solace in its straightforward methodology, designed to gauge consumer price perceptions and sensitivities. The model involved presenting survey participants with a series of questions focused on their willingness to purchase products at different price levels. By analysing their responses, businesses could derive four critical price points:

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• Point of Marginal Cheapness,
• Point of Marginal Expensiveness,
• Indifference Price Point and the
• Optimal Price Point.

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Next, companies need to visualise the survey results on a graph to identify the ideal range of pricing.

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Also Read: Price Sensitivity Examples and SYMSON’s Discovery of New Drivers.

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The point where the "too cheap" and "too expensive" lines intersect is referred to as the Optimum Price Point (OPP). Positioned between the Point of Marginal Cheapness and the Point of Marginal Expensiveness, this price theoretically represents the optimal choice. This is because it aims to minimize dissatisfaction among consumers, regardless of whether they find the product's price too low or too high.

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Moreover, the Van Westendorp price sensitivity meter helps gauge customer sentiments associated with a potential price range. Despite this, the van Westendorp model has its disadvantages. As you understand, the method revolves around the customers' willingness to pay while ignoring any of the features or value of the product.

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Also Read: The Price Elasticity Guide to get an in-depth understanding of how it works.

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Limitations of the Van Westendorp Pricing Model

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While the Van Westendorp Pricing Model brought undeniable advantages, as businesses increasingly embrace more advanced analytical methods and technological tools, the model's limitations come to the fore. Not only does the price sensitivity meter disregard product value and features, but it also ignores multiple other relevant parameters that are a must to consider to find optimal price points. Let’s take a closer look.

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1. Assumption of Linear Price Perception

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The model assumes that consumers perceive prices linearly, meaning that their responses to survey questions are solely based on price and do not consider other influencing factors. In reality, consumer perception is multidimensional, influenced by factors like brand value, quality, and market trends. As a result, the model's output may not fully represent the complexity of real-world purchase decisions.

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2. Lack of Competitive Landscape Analysis

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The Van Westendorp model may work well with new products. However, there is still a sense of doubt as customers would fail to estimate the product value with no reference point.

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Today, no pricing decision is made in isolation. Ignoring the competitive landscape can lead to suboptimal outcomes. The Van Westendorp pricing model does not account for competitors' pricing strategies, potentially resulting in pricing recommendations that do not align with market realities.

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3. Sets lower price points making companies leave money on the table

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The pricing meter’s sole dependence on pricing questions showcases the intentions of pricing research as very obvious to the respondents. Customers may prefer to pay higher than the range identified by the model. That’s because customers may check several other factors not specified in the Van Westendorp model to pay the higher amount.

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Research states that the Van Westendorp price sensitivity meter invites lowballing, that is, finding “optimal“ price points that are lower than what actual prices could have been set. Moreover, there were tests run on established products to understand the model’s accuracy. To this, the resulting price was quite lower than its current price.

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In fact, the current price point at which the product is being sold actively falls outside the “acceptable“ range of the meter. Hence, this method makes businesses lose money on the table with inaccurate price recommendations.

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Also Read: How to Deal with Price Sensitive Customers using pricing Strategies?

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4. Misinterpretation of “optimal“ and “indifference“ price points

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The two price points, "optimal" and "indifference", can be misinterpreted. These specific points fail to factor in essential elements such as product costs, profit margins, and the complete revenue scope of a product. Instead of serving as rigid rules, these points, along with the acceptable price range, can work as guiding principles. Also, they must be complemented by internal company insights when establishing the ultimate retail price for a product.

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5. Inadequate Incorporation of Market Segmentation

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Businesses often target diverse customer segments, each with unique preferences and sensitivities. The model treats all survey respondents as a homogenous group, disregarding the need to tailor pricing strategies to specific market segments.

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6. Limited Predictive Power

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The model's focus on price points may not always translate into actionable strategies for setting prices that optimise revenue. It lacks the predictive power of more advanced pricing models, such as econometric models that consider a broader range of variables.

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Overall, the pricing model may initially seem intuitive, but its result is confusing. Besides the graph, the meter has no theoretical foundation, which makes it tough to comprehend. The model’s Optimal Price Point doesn’t consider fixed and variable costs other than customer sentiments. Dr. Zhang says that the OPP of the Van Westendorp pricing model “is not the actual optimal price” and further says that “An optimal price without any information on your costs is very flawed to start with.“

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A Sustainable Way to Approach Price Management

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While the Van Westendorp pricing model is a thing of the past, its lack of other relevant parameters at its base would have bred inaccurate pricing decisions early on in its usage trajectory.

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Today, pricing involves multiple aspects to find the optimal price points in a dynamic market. From considering demand level, brand value, product features, competition, seasonality, inventory, and so on, to automatically setting the right prices across several online platforms/websites, AI-powered pricing management systems like SYMSON ensure high accuracy.

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• AI-driven pricing systems cut out any scope for human errors and accelerate the pricing process. Its automation continues to research real-time data and market conditions to assess product pricing.

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• Price recommendations count multiple parameters that affect the revenue/profit margin growth to maintain accuracy.

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• It also considers the margin/discount limitations set as your own business rules to find optimal prices. This prevents the price engine not to cross a certain range that would impact the profitability of the product or category or the business.

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• AI-powered price management systems use advanced datasets: historical price points and sales performance, data scraping for competitor prices, customer behaviour, economic conditions and so forth. This ensures precision and drives healthy revenue growth over a period of time.

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• To stay relevant in the market, many companies use dynamic pricing abilities. That is to change prices on a timely basis according to the demand level and competition at a given time of the day/week/month.

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The Van Westendorp pricing model stands as a testament to innovation in its time, offering a simplified approach to pricing research. However, businesses identify its limitations and incorporate alternatives like advanced data analysis, Machine Learning, automation and Artificial Intelligence. With strategic and timely pricing processes, companies can maintain profitability in a sustainable way. You can free up more time and energy for your pricing team to focus on complex driver identification that will perfect your pricing even further.

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