UTS24760 Chap.12 Price Discovery: Van Westendorp and BDM
Price Discovery: Van Westendorp and BDM
Price discovery methods exist to settle one thing: how much would this buyer actually hand over? The subject names three. The Van Westendorp price sensitivity meter and the Becker DeGroot Marschak procedure are direct methods; conjoint analysis is indirect, inferring willingness to pay from trade offs between price and other attributes, and it is taught in its own session.
Four best practices apply to all three: choose respondents carefully with prior segment definition and target selection, describe the product concept in detail and show it where possible, simulate the purchase decision including its reference prices, and make the procedure incentive compatible so respondents achieve their best outcome by acting on their true preference.
The price sensitivity meter asks four questions about the prices at which a product becomes too expensive, expensive, inexpensive, and so inexpensive that quality is doubted.
Cumulating the responses, downward for the two cheap questions and upward for the two expensive ones, produces four curves whose intersections are four price points: the indifference price point, where the dear and cheap curves meet; the point of marginal cheapness, where dear meets too cheap; the point of marginal expensiveness, where too dear meets cheap; and the optimal price point, where too dear meets too cheap.
The range between the two marginal points is the range of acceptable prices. Five objections are published against it, among them that no behavioural theory underpins it and that it makes no attempt to reproduce a real purchase, and its originator warned against reading awareness of a high price as unwillingness to buy.
The Becker DeGroot Marschak procedure answers those objections by making the exercise incentive compatible, and the published comparison set for this subject finds the meter biased yet of high predictive quality, comparable to the incentive aligned mechanism.
What this chapter covers
- 01
The shared question and the three named methods
- 02
Four best practices, including incentive compatibility
- 03
The four price sensitivity questions
- 04
IPP, PMC, PME and OPP defined
- 05
Cumulating in two directions and why the curves cross
- 06
The five published problems with the meter
- 07
The Becker DeGroot Marschak procedure step by step
- 08
What the published comparison of the two methods found
Reading four price points and checking a discovery design
- +1Establish the acceptable range. The two marginal points bound it, so acceptable prices run from $22 to $45, and in a well established market few competitive products would fall outside that band.
- +1Compare the two instruments. The reservation price mean of $33 sits inside the band and essentially on the optimal price point of $34, which is the agreement the published comparison reports between the hypothetical meter and the incentive aligned mechanism.
- +1Identify the design flaw. The distribution's upper bound of $35 lies below the point of marginal expensiveness of $45, so any respondent whose true willingness to pay exceeds $35 wins the product at every draw and has no incentive to state a higher figure.
- +1State the consequence and the fix. The measured mean is censored from above and understates willingness to pay, so the apparent agreement between the two instruments is partly an artefact of the bound. Re run with an upper bound above the point of marginal expensiveness before drawing any conclusion about the top of the range.
Key terms
- Indifference price point
- Where the dear and cheap curves cross: as many people call the item expensive here as call it a bargain. It tracks something already true of the market, either the typical figure buyers there are paying or whatever the leading brand charges, so it is a reference point rather than a target.
- Optimal price point
- Where too dear crosses too cheap. It is the figure the meter nominates as the seller's best single choice, because at that level the fewest buyers are ruled out for either reason.
- Range of acceptable prices
- The band between the point of marginal cheapness and the point of marginal expensiveness. In a mature category you would expect nearly every rival product to fall inside it, which makes the band a useful sanity check on any figure another method produces.
- Incentive compatibility
- A property of a measurement task that leaves a respondent better off answering honestly than answering strategically. It is the design goal that separates the Becker DeGroot Marschak procedure from a hypothetical survey.
- Reservation price
- The maximum amount a consumer states they are willing to pay in a Becker DeGroot Marschak exercise. Because the price actually paid is a separately drawn number, the consumer's best response is to state their true maximum, neither more nor less.
Price Discovery: Van Westendorp and BDM FAQ
Why are there four questions rather than two?
Because resistance comes from both directions. Two questions probe resistance from above, at the point where a product becomes expensive and then too expensive to consider, and two probe it from below, at the point where it is a bargain and then so inexpensive that quality is doubted.
The fourth is the one students find surprising, and it is the quality signalling effect the price value map predicts: a price can be too low, and the meter turns that into a measurable quantity rather than an observation.
If the meter is biased, why does the subject teach it?
Because skewed and useful are not contradictory. The published comparison holds both halves at once: the exercise is imaginary for the respondent and its questions probe the point of least resistance, so the figures come back distorted, and the same abstract nonetheless rates the instrument a strong predictor whose output tracked that of the procedure where real money changed hands.
A distortion that is stable still leaves options in the right order. A market research firm quoted alongside puts the practical position well: use it to read what buyers expect to pay, not to settle what you will charge.
Which method should I recommend in a case?
Match the method to what the case can support. If you have survey access and need a quick read on a range, the meter is defensible and cheap, provided you state its limitations. If the decision turns on the level rather than the range and a real transaction can be staged, the Becker DeGroot Marschak procedure is the incentive compatible choice, and you must specify the distribution and its bounds.
If the product has several attributes and the question is how customers trade price against them, conjoint is the indicated method on the grounds the module gives, that it is indirect, uses trade offs and best replicates an actual shopping process.
Assessment move
Build the chart once by hand from a small dataset of your own, perhaps twenty imaginary respondents, and you will never again get the cumulation direction wrong. Do the four steps in order: collect, count with a count function or a pivot table, cumulate, then convert to a proportion of the total responses.
Check your work with the subject's own arithmetic: on 104 responses the proportion at the lowest price is one minus one over 104 for too inexpensive and zero over 104 for too expensive. Then learn the four definitions as sentences rather than as labels, because each one names which two groups are equal in size, and the definition is what you write on a slide.
Finish by rehearsing the limitation you would state for whichever method you recommend: every discovery method in this module is defensible with its caveat attached and indefensible without it.
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