Tools Used In This Recipe
As a growing startup you should always be evaluating your price relative to competitors. Being priced higher isn't necessarily a bad thing if your potential customers value your product more than competitors. But getting meaningful, statistically meaningful information on your customers' perception of value can be difficult. In this Recipe you'll use a survey based on the Van Westendorp Price Sensitivity Meter to understand price points at which your customers believe your price is either a bargain, getting expensive, too expensive to consider, and so cheap that they would feel it was low quality. You can use this Recipe as an input in your B2C or your B2B/Enterprise pricing strategy.
Getting Started
The Van Westendorp price sensitivity survey was first used in 1976 and continues to be a useful tool for a new market entrant to understand how customers value your product. It has only four questions:
- At what price would you think [PRODUCT NAME] is a bargain – a great buy for the money?
- At what price would you think [PRODUCT NAME] is getting expensive, but you still might consider it?
- At what price would you think [PRODUCT NAME] is too expensive to consider?
- At what price would you think [PRODUCT NAME] is so inexpensive that you would question the quality and not consider it?
With enough responses from knowledgeable customers you can identify the range of prices between bargain and getting expensive that will best reflect the value that customers assign to your product.
Using the Van Westendorp price sensitivity meter survey
In order to get meaningful data from this tool you'll need access to a pool of respondents who are knowledgeable about your industry. Ideally they have purchased other products in your market in the past. You'll need at least 100 responses for the data you collect to be statistically valid, but with as few as 20-30 responses you can get directional results that you can combine with early sales data to help identify your ideal price point.
Setting up the Form and Spreadsheet
We've published an implementation of the survey at the link below, using Google Forms and Google Sheets to make it easy to adopt in your organization. We chose Google Forms because of its ubiquity and the fact that it doesn't cost anything to create and publish one. The downside to Google Forms is validation and customization options are extremely limited. If your budget allows you may wish to use Typeform or another online form instead as these have built-in validation that will prevent users from submitting invalid data.
When you click on the link above you'll be prompted to make a copy of the Google Form into your own account (naturally you'll need a Google account for this, but a free GMail account is fine). You'll also need to make a copy of the analytics Google Sheet:
Once you have copies of both the Form and the Google Sheet saved to your account, switch to the Google Form and click the Responses tab. Now click the green Google Sheets button on the right.
You'll be prompted to create a new spreadsheet or use an existing spreadsheet. You'll need to select the copy of the spreadsheet you made above.
Once you have connected the Form and Spreadsheet, switch to the browser tab that contains the Google Form. You'll see a screen that allows you to edit the question data for the survey. At the top you'll see the survey title and introductory text. Feel free to customize this as much as you would like to fit your product and company, but at a minimum you'll need to replace the text in brackets [ ] with your product and company.
The next section contains instructions for you as the survey designer to effectively use the tool. As the text says, the survey will still work if participants don't have prior exposure to your product, but in that case you'll need to add sections to the survey with information about your product's features. There is a toolbar to the right of the survey that has buttons to add content to the survey, including images and video. If you have a product overview video that's a good candidate for use here. When you are finished customizing the survey, be sure to delete the instructions section.
The first question is used to qualify respondents. The Van Westendorp survey is only effective if participants are personally familiar enough with your product's market to understand your product's value. Change the text in brackets to reflect your product market. By default only respondents who select Very or Somewhat are eligible to respond, but if you want more certainty you can edit the survey to only allow participants who select Very to take the survey.
Users who select one of the other options skip the survey questions and are presented with a message indicating that they do not qualify for the survey. Note that users who reach this stage can still submit a blank response, which looks annoying in the survey results but is accounted for by the template.
The next section contains the actual survey. Here again you'll need to change the text in brackets, but do not change the other text in the questions or change the order of the questions.
Once you have the survey content complete you can further customize it if you wish. In the upper right is a palette icon that allows you to change the colors to match your brand. The eye icon allows you to preview your survey as it will look to a respondent. When you're ready, click the Send button to see options for sharing your survey with respondents. You can enter email addresses of recipients if you know them to send them a link to the survey through Google. You can also generate a link to the survey that you can share via email, social media, and more. Lastly there's an option to generate an embeddable block of HTML code that you can use to integrate the form into your Website.
Analyzing the results of your pricing survey
The Google Sheet you connected earlier has been preconfigured to generate the data structures needed to visualize the pricing data. Switch to the browser tab that contains the Sheet. In addition to the tab created by Connecting it to the Google Form, The sheet has six other tabs.
Most of the formulas have been preconfigured for you, but we'll walk through them all so you know how to use the template. The first tab, named Form Responses 1, contains the raw data from survey participants. You can see the questions from the survey at the top of each column and entries in each row below. If a user didn't qualify for the survey their answers are blank. Note that the data in the screenshots for this section was generated in order to build this Recipe. Your data will look different.
The Instructions tab contains information about the sheet in case someone makes a copy without being aware of this Recipe. You can ignore it.
The net tab is titled Form Values (Copied). This tab exists only to work around an issue with the way data from a Google Form is inserted into Sheets. You need to take an action to get the formulas in this sheet to 'recognize' the data added by the form. Select columns B through E and click the 'convert to currency' button. You'll see all the cells that have a #REF! error show the correct data from the Form Responses 1 tab.
The next tab over is named Quality Check. Because Google Form can't validate answers to questions based on the values from other answers, this tab basically does that for you. So if a respondent entered data that doesn't make sense, like listing a price in the Too Cheap field that is higher than the price for Too Expensive column, this tab catches that. Data that fails validation is excluded here. You don't need to adjust anything in this tab.
The next tab over is the Values tab, where the statistical analysis happens. All of the price values from the Quality Check tab are copied to this tab, sorted, and duplicates are removed. This process is built in to the sheet formulas; you don't need to do anything here. There are columns for each of the questions. The top cell in each column (right below the header) uses Google Sheets' FREQUENCY formula to count occurrences of each value in the first column in this tab with the values from the matching column in the Quality Check Tab.
The next tab over is the Final Data tab. This contains the calculated values that will be used to show us the range of prices that are acceptable to different percentages of respondents. For an example of how to read this table, take the row with the Value $45. Reading across, we can say that "At a price of $45, 87% of survey respondents felt the product was a bargain. No participants felt it was getting expensive or too expensive to consider, and 17% of respondents felt the product at that price was so cheap that they would question its quality."
The last tab is a line chart of the data from the Final Values tab. It shows the relationship between each question's responses at each price point. Note that your graph will look different, but if your respondents were knowledgeable about the industry and responded to your survey based on their understanding, your graph should have two lines going from top left to bottom right (for cheap/a bargain and too cheap/low quality), and two going from bottom left to top right (getting expensive and too expensive). The lines may overlap. In the case of the graph below there are two key points:
- The intersection between Cheap (the blue line) and Expensive (the red line). For a perfectly statistically valid survey this would be the optimal price point, but we caution against simply using this value as-is because factors like respondent quantity, market knowledge, and their ability to accurately assess the value in your product can cause the results to be suspect.
- The potential range of prices. This is the intersection of the Too Cheap and Expensive (green and red lines) on the left, and Cheap and Too Expensive (blue and yellow lines) on the right. In the graph below those values are roughly between $22 and $37. This range represents acceptable prices based on the data in this survey, and you can test various price points in the real work to help refine your pricing until you arrive at an optimal price.
Wrapping up
If you can find 20-30 (or more) people who are willing to spend a couple of minutes reviewing your product and answering questions about price points, you can use the Van Westendorp price sensitivity meter to bring data and analytics to your pricing decisions, and remove some of the guesswork. It shouldn't be the only tool you use to set pricing, but used correctly it can be a powerful tool in positioning your company for growth.
The contents of this Recipe are © Innovation Works, Inc. and are licensed under CC-BY-SA 4.0 . Contact us with questions or feedback, or to learn more about our structured program in Entrepreneurism based on Startup Recipes.