Whether you’re launching a new product or optimizing the price of an existing one, the Price Sensitivity Meter (PSM) is a great way to get feedback on price ranges. From its relatively low cost to its ease to administer, this particular method of price research has several advantages over alternatives when you’re faced with the challenge of finding the best price.
The Price Sensitivity Meter uses open-ended survey questions to predict the sensitivity of customers to different price points. A description and/or visual of the product is displayed and four questions are posed about what the responder thinks is too expensive; too cheap; a bargain; or a little high but still worth considering. For products where prospective customers may not have any experience, it can sometimes be prudent to include a scale of prices to ensure respondents have a general idea of the price landscape.
Unlike other methods, the open-ended questions used by the Price Sensitivity Meter allow for more
variation and detailed answers. The results capture the range of prices your sample considers
acceptable and the data you collect can be graphed for easier visualization.
The optimal price is usually considered the point at which the number of respondents who believe the
product is too cheap is equal to the number that say it’s too expensive. That’s not to say that you must
choose that particular price point. You can still remain competitive by choosing a price point within
the competitive range determined on your graph.
The range of competitive prices is determined at the low end by the intersection of the “too cheap” and “expensive” curves and at the high end by the intersection of the “bargain” and “too expensive” curves. From within that range of prices, you should be able to determine a price point that will be effective with your target market. However, keep in mind that the Price Sensitivity Meter is just a tool and you can only know definitively if your pricing is right by testing with real customers.
People tend to consider three main things when they are shopping: price, quality and value. It’s important to recognize the value-perception of your product because your price needs to mirror it to successfully attract customers. Therefore, when users see a higher price, they will automatically look for more value from your product and brand and visa versa.
However, there are some that say the Price Sensitivity Meter is too simple to effectively help with pricing products. They claim the methodology is questionable and open-ended answers by respondents may produce unreliable results with some potential customers saying a lower price than what they are actually willing to pay.
With that said, the Price Sensitivity Meter can be a useful starting point for further analysis and shouldn’t be done in isolation of other research. The real value this technique provides is providing a range of the perceived value of your product without having to guess or rely simply on competitor pricing. Your product and brand are unique and you need a price that matches your perceived value amongst your users. Failing to do that can result in you losing out on significant revenue.