The Price Sensitivity Meter method for the analysis of consumer price preferences was proposed by the Dutch economist Peter van Westendorp in 1976 at the ESOMAR conference. It is a survey-based approach that has become one of the standard price acceptance measurement techniques in the market research industry and is still widely used for during early-stage product development.

Price acceptance and price sensitivity are measured in van Westendorp’s approach by four open-ended survey questions:

-At which price on this scale are you beginning to experience … (test-product) as cheap? -At which price on this scale are you beginning to experience … (test-product) as expensive? -At which price on this scale you are beginning to experience … (test-product) as too expensive – so that you would never consider buying it yourself? -At which price on this scale you are beginning to experience … (test-product) as too cheap – so that you say “at this price the quality cannot be good”?

Respondents with inconsistent price preferences (e.g. “cheap” price larger than “expensive” price) are usually removed from the data set. This function has built-in checks to detect invalid preference structures and removes those respondents from the analysis by default.

To analyze price preferences and price sensitivity, the method uses cumulative distribution functions for each of the aforementioned price steps (e.g. “how many respondents think that a price of x or more is expensive?”). By convention, the distributions for the “too cheap” and the “cheap” price are inverted. This leads to the interpretation “how many respondents think that a price of up to x is (too) cheap?”.

The interpretation is built on the analysis of the intersections of the four cumulative distribution functions for the different prices (usually via graphical inspection). The original paper describes the four intersections as follows:

• Point of Marginal Cheapness (PMC): Below this price point, there are more respondents that consider the price as “too cheap” than respondents who consider it as “not cheap” (intersection of “too cheap” and “not cheap”). This is interpreted as the lower limit of the range of acceptable prices.
• Point of Marginal Expensiveness (PME). Above this price point, there are more respondent that consider the price as “too expensive” than there are respondents who consider it as “not expensive” (intersection of “not expensive” and “too expensive”). This is interpreted as the upper limit of the range of acceptable prices.
• Indifference Price Point (IDP): The same number of respondents perceives the price as “cheap” and “expensive” (intersection of “cheap” and “expensive”). In van Westendorp’s interpretation, this is either the median price paid in the market or the price of an important market-leader.
• Optimal Price Point (OPP): The same number of respondents perceives the product as “too cheap” and “too expensive” (intersection of “too cheap” and “too expensive”). van Westendorp argues that this is the value for which the respondents’ resistance against the price is particularly low.

Besides those four intersections, van Westendorp’s article advises to analyze the cumulative distribution functions for steep areas which indicate price steps.