To determine and set the most proper selling price, there are various methods to perform. One of the most popular is the Price Sensitivity Meter (PSM) method.
Introduced in 1976 by a Dutch economist, Peter van Westendorop, the PSM method has been widely suggested and commonly accepted to check price suitability with product or service quality in the eyes of consumers. This method is based on the concept that the most proper price is the most rational value in the eyes of consumers.
The popularity of PSM is quite high. Many businesses opt for PSM as the method to aid in determining the most appropriate selling price for products or services. As such, it is highly important for businesses to understand the correct way to conduct the PSM method.
The Assumption
The PSM method is conducted with the assumption that respondents are able to think of a price that is suitable for a product or service. They are deemed capable in seeing the intrinsic value of products or services, hence they will know the most appropriate and proper selling price. Participants of PSM will be asked to determine the most suitable price for a product or service. Through this, PSM is considered fit to provide a pricing recommendation most suited to the product or service’s quality.
The Conduct
In conducting PSM, there are four commonly asked main questions for respondents. Some variations of the set of questions can be found, but the overall has the same core.
Respondents will be presented with the product or service to be evaluated. They will not be presented with any competitor or any price level previously set. A presentation of the quality and utility of the product or service will be given to prepare respondents with sufficient understanding. Once that is done, price determination will be done by answering a set of questions.
Respondents will be asked to assess a pricing scale, covering the lowest price level to the highest. The lowest level is a very cheap price, leading them to doubt the value or quality of a product or service so that they will not buy it. Meanwhile the highest level indicates a very expensive price so that they equally will not make the purchase. Below are the questions:
- At what price would you think the product or service is too cheap, so that you would feel the quality is not very good? (Very Cheap)
- At what price would you think the product or service is a bargain, but you would not doubt the quality — making it a great buy for your money? (Cheap / Good Value)
- At what price would you think the product or service is expensive, but you would still consider buying it due to its quality? (Expensive)
- At what price would you think the product or service is too expensive, so that you would not buy it — as the quality does not justify the price? (Very Expensive)
The Data Analysis
After conducting the survey, the collected data will be analyzed. The process involves calculating a distribution for the price cumulative frequency of the four measures presented above. Then a distribution analysis is done for the two price cumulative frequencies: not cheap and not expensive. This analysis is taken from the 100%-cheap price range and 100%-expensive price range.
The most suitable price range is determined from the intersection point between very cheap and not cheap of the lower bound. This is called Price Marginal Cheapness (PMC). As the opposite and still within the acceptable price range, the upper bound of the intersection is called Price Marginal Expensiveness (PME); where the too expensive range intersects with expensive/not cheap.
Take an example case of a product with a price range of IDR 20,000 to IDR 45,000. The interval is IDR 1,000, and prices in various stores are in the range of IDR 30,000 to IDR 35,000 — which should also be taken into consideration. Hence the acceptable price range for consumers is between IDR 28,500 (PMC) and IDR 38,200 (PME).
The PSM method is most fitting to set the price of a new product or service. Furthermore, this method can be utilized by various types of businesses due to its simplicity. It does not require very sophisticated research tools, but the results will provide ample insight to determine and set a price — especially in a market that is sensitive to pricing.
