Go To Market Strategy; A Complete Practical Guide

It’s not a good idea to use Cost Plus pricing and it’s a good idea to use value based pricing, right? But the question is how?

How do we find out how much to charge customers and what’s the right price?! And here is the dilemma!

Raise prices too high, and customers might think they’re not getting value for money and you may lose customers and therefore lose money

Drop them too low, and they might think the product is cheaply made and is low quality and on top of that you may not make enough profit because your prices are too low. Both of these scenarios are bad !

Then, what is the range of acceptable prices for a product? How do we find it out.

Well the good news is that in this section I am going to teach you an easy yet widely popular and an industry standard method to not only find the optimum price but also its lower and upper limits. I really like this method. It is called Van Westendorp Price Sensitivity Meter or PSM. This method is developed by Dutch economist Peter Van Westendorp in 1976. It is used by many international market research and consulting firms because of its simplicity and effectiveness! These firms charge hundreds of thousands of dollars if they run this method for a company so learning this has a lot of value for you. Now, let’s get right into it and understand this amazing method next.

Suppose you have a new product, say a new watch, that you are going to introduce to the market.

To use Van Westendorp method you start asking four simple questions from your target market audience or people who preferably have similar characteristics to your target market:

First, At what price would you consider this product to be so expensive that you would not consider buying it? This is the "Too Expensive" zone.

Second, At what price would you consider the product to be priced so low that you would feel it’s too cheap and the quality couldn’t be very good? This is the "Too Cheap" zone

Third, At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)

This is the "Marginal Expensiveness" zone or where it starts to get expensive. People are starting to raise eyebrows.

Fourth, At what price would you consider the product to be a bargain—a great buy for the money? This is the "Marginal Cheapness" zone. The point where it gets to be cheap. Not everyone's jumping on it, but they're thinking about it. This is a sweet spot where your price feels fair and tempting.

After asking these questions from a large number of potential target customers, you should be able to create a plot with price on the X axis and Cumulative percentages of responses on the Y axis consisting of four lines

The first two lines are the cumulative percentage of two questions about when the product getting expensive and when it’s too expensive and then two other lines are the inverted cumulative percentage of the other too (when the price is too cheap and when it’s a bargain)

Now according to the Van Westendorp pricing technic, there are a few points of intersection on this graph that are important here:

The first one is where equal percentage of respondents considered the price too cheap as those who considered it getting expensive, this is called the point of Marginal cheapness or PMC

The second point is at the price where equal percentage of customers considered it too expensive as it being a bargain. This is called PME (Point of Marginal Expensiveness)

Now the range of prices between these two price points is called the range of acceptable prices. Meaning that your price can be at any point in this range!

The most important intersection here is the point where equal number of customers consider the price too cheap as those who consider it too expensive! This is called the Optimum Price Point or OPP and is used by the industry for the benchmark price or the base price!

And your price can then vary from the OPP and fluctuate between PMC and PME.

there are three main scenarios where a Van Westendorp analysis will be especially useful to you:

First; When bringing a new product to market. If you are planning to launch a new product or service, you can use the tool to survey your target market in order to find out the price that customers are willing to pay for your product value proposition. Also Whether you are considering an aggressive penetration pricing strategy, a high price luxury approach, or you’re simply not sure, the Van Westendorp questions can help you determine the best strategy to appeal to your target market, giving you the confidence to launch knowing your price is in the range of customers expectations and is reasonable and will make you money.

Second, When pivoting or repositioning an existing product: If you're running a business and thinking about tweaking your prices, the Van Westendorp method is a game-changer. This method helps you figure out what your customers really think about your current prices and predicts how changes might affect your sales. By using the Van Westendorp pricing model, you can find that sweet spot where you make the most money. It's like having a map to guide you to the perfect price that keeps both you and your customers happy.

Third, When changing up product features.

Companies change their product features all the time and need to decide whether they should or can change their prices for example, Did you know that a Snicker’s bar is 11% smaller than it used to be, but the price is around the same? Perhaps the managers used the van westerndorp study and know that their Optimum price point of sneakers bar so they don’t want to change that price, then when costs go up, they need to reduce the size of the product instead of increasing the price!

A Van Westendorp price sensitivity analysis can help you determine what price change is acceptable to your market corresponding to proposed changes in features, or if, in fact, you do not need to change prices at all. For example if you find out that customers are very price sensitive, you would want to keep the price the same of even lower when changing product features! That’s what many companies do for example in the consumer product category.

Also even if you are not making big changes, you can use the van westendorp plot to see your pricing power range! Like you can increase your prices in the range to improve your profits. So overall, a very useful tool.

Using existing tools for surveying customers such as Qualtrics or Survey Monkey or any other platform you can create Van Westndorp Surveys and have the target customers fill them out. Then these tools will automatically create for you the Van Westendorp graph with four lines and will provide you with PME (Point of Marginal Expensiveness), PMC (Point of Marginal Cheapness), Acceptable Price Range, and OPP (Optimum Price Point).

This lecture will demonstrate for you how to easily implement this powerful tool.

No method is perfect! This is still a survey method so it does have all the drawbacks of this method ! respondents can just randomly answer or being smart in answering the questions so to impact the price too low or too high!

It does also ignore competition and demand or purchase likelihood at any given price! In another word, we can’t really gage whether customers would actually buy the product at the stated prices or not !

But this is easy to address, we can ask intent questions or run field experiments with the prices extracted from Van Westendorp pricing method to see if these prices work good for the target customers.

Bonus Tip: Don't just rely on the Van Westendorp method. Consider other factors like your competition, production costs, and marketing strategy. Pricing is a puzzle with many pieces, so use all the tools at your disposal to find the perfect fit!