Price-Sensitivity Measurement

Abstract

One way to determine an optimum price for a product or service is to assess what the customer is willing to pay and then set production methods and costs to achieve a profit based on that price. Traditional pricing methods, including "cost-plus" and "gut feel," operate backwards by setting a price based on the operator's costs or profit goals. Measuring the customer's price sensitivity in a reasonably unbiased way is difficult, however. Moreover, the matter of appropriate pricing is complicated by the fact that consumers use price as an indicator of quality. So, it is not only possible to set a price too high (pricing the item out of the market), but also to set it too low (giving a perception of unacceptably low quality). The statistical technique of price-sensitivity measurement (PSM) works by asking consumers questions that allow them to indicate when a product is "too expensive" or "too cheap." Graphing these numbers shows a range between expensive and cheap-indicating the likely best price range. Proprietors of Taco Bell applied the PSM method in creating their value menu, with considerable success. As an example, the authors developed a price-value range for buyers in the association-meeting market.