What is PSM Analysis? Pricing is a very important element of marketing. Pricing strategy is one of the strategies that make up the marketing mix, but let’s look at pricing PSM analysis, one of the methods used to determine how to set prices.
What is PSM Analysis
PSM（Price Sensitivity Measurement） analysis is a pricing framework developed by Dutch economist Van Westendorp. PSM analysis can be used to determine what level of price customers think is appropriate for a particular product or service. This allows us to determine the possible price response to demand for a product or service based on customer perceptions. It is possible to say that a product is too expensive to sell, but it is also possible to say that a product is too cheap to sell.
PSM analysis can be used to determine the customer’s temperature on price for a current product or to assume a reasonable price for a product not yet on the market. The “lowest price,” “highest price,” “reasonable price,” and “ideal price” are obtained from the intersection of the cumulative curves obtained by asking customers four questions, and the Range of Acceptable Prices offered in the market is derived.
The four questions are as follows, and the analysis is performed by curving the responses obtained from these questions.
- At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
- At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
- 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)
- At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)
By plotting the cumulative curve, the following prices can be determined from the points of intersection.
Highest price： Any higher price is unacceptable and not a price to buy.
Compromise price： The price at which customers are willing to buy while making compromises
Ideal price： Optimal price at which customers can purchase without resistance
Guaranteed minimum quality price：Price at which customers would be anxious to buy if the price were any lower
Above the highest price is a price range that is too high. Below the guaranteed minimum price is a price range that is too low. Between the guaranteed minimum price and the highest price is the price range that is acceptable to the customer, i.e., the proper price range. Within this price range, the undervalued, fair, and overvalued price ranges can be calculated based on the relationship between the compromise price and the ideal price.
While prices will vary depending on the company’s strategies, such as branding, measuring how much a customer is willing to pay and whether they are concerned or comfortable with the price is possible. PSM analysis can be beneficial for new entrants.