Price Sensitivity Measurement

Price Sensitivity Measurement

Price Sensitivity Measurement (PSM for short) is a method for measuring consumers’ price expectations that has been tried and tested for many years. It very reliably determines a price range – usually for products or services already launched on the market – within which the greatest expected acceptance lies. A PSM analysis is useful, for example, when a price increase is planned or in comparison with competing products.

The PSM not only shows the price range that reflects the price-performance perception of the consumers of a certain category. It also determines an optimal price point, which can serve as an important indicator for a pricing strategy. To determine this data, consumers are asked about prices they perceive as either too low or too high for a product or service. The results are graphically displayed to show price thresholds for low and high prices and the optimal price.

The PSM is not only suitable for optimizing the price of an existing product. The analysis is also suitable for determining a price for a newly developed product in an existing category. The results can be used to derive strategies for aggressive pricing policies to enter a market, or to maximize prices of an existing product.

For the test subjects, the survey is as simple as it is entertaining. The subjects are asked to indicate a total of four price points for each product. These are broken down as follows: The price that, from the subject’s point of view,…

1. …is too expensive, so that a good/service is not purchased or used.
2. …can still be considered, although it is expensive
3. …is appropriate, thus represents a bargain
4. …is so cheap that they doubt the quality of the product/service and therefore do not buy it.

Optimal price and normal price

All answers are aggregated and displayed as curves. The intersections of the curves then yield both the acceptable price range and the optimum price point. The optimal price point (OPP) is at the intersection of the lines “too expensive” (a) and “too cheap” (d). In the example (Figure 1), this is €4.30. At this price, the number of people who consider the product too expensive is just as large as the number of people who consider it too cheap.

The perceived normal price of the category, also called Indifferent Price Point (IPP), is at the intersection of the curves “expensive” (b) and “reasonable” (c), in the example at €4.75. At this price, the number of people who consider the product expensive is as large as the number of people who consider the price reasonable.

Price limits

To determine the upper and lower limits of the acceptable price range, a different presentation is chosen. For this purpose, the curves of questions b and c are inverted, i.e. displayed in reverse. “Expensive” becomes “not expensive”: This curve now shows for each price point the proportion of the total sample that does not yet consider the product to be expensive. Similarly, “acceptable” now becomes “no longer acceptable”: At each price point, this curve now shows the proportion of the total sample that no longer perceives the price as acceptable (see Figure 2).

The intersection of the “too cheap” (d) and “no longer acceptable” (c inverted) curves shows the lower limit of the acceptable price range. This point is called the Point of Marginal Cheapness (PMC); below this price, one would lose more sales volume than one would gain because the product quality would be questioned. This price can be taken as a reference point when entering a market with an aggressive pricing policy. In the example, this price is €3.75 (Fig. 2).

Similarly, the intersection of the “too expensive” (a) and “not expensive” (b inverted) curves shows the upper limit of the acceptable price range. This point is called the Point of Marginal Expensiveness (PME); at this point, the number of people who perceive the price as too expensive is equal to the number of people who perceive the price as not yet too expensive. Beyond this price, more consumers will perceive the price as excessive and doubt the value for money. Therefore, as a rule, this price should not be exceeded. Most of the time, the category leader chooses its price in this region.

Certain and potential buyers

Another component of the PSM is the determination of certain and potential buyers. A subject is considered a certain buyer in the price range between the price perceived as “reasonable” and the price perceived as “expensive”.

The same person becomes a potential buyer if the price of the product is between the price the test person perceives as too expensive and the price he or she perceives as too cheap. The result of the total sample is illustrated graphically (see Figure 3).

Competitive situation, market dynamics and consumer management

When using the PSM, it must be taken into account that the price ranges and price points determined do not include the competitive situation, i.e., they assume that the product or service tested is unique. However, since several suppliers are normally active in the market, they will naturally attract certain and potential buyers. Therefore, all recommendations from the PSM must always be coordinated with the respective pricing strategy to ensure the greatest possible success.