If you’re struggling with pricing your SaaS platform, the Van Westendorp Price Sensitivity Meter is everything you want. Based on a clear framework, the Price Sensitivity Metter is one of the few direct techniques people use to research pricing.
I first discovered it thanks to the “Product-Led Growth: How to Build a Product That Sells Itself” book by Wes Bush. When reading about it, the Meter seemed like a straightforward and accurate way to figure out how much to price a product.
But then, I realized it didn’t make too much sense. Moreover, some aspects of human nature make the Meter irrelevant.
Can we understand people’s perceptions of value?
That’s the question Dutch economist Peter van Westendorp tried to answer when he came up with the Price Sensitivity Meter in 1976. He believed that people could tell how much they’re willing to pay for a product based on its description.
Back in the day, we knew very little about behavioral economics. It was a given that people made economic decisions based on rational thinking. Very few researchers, such as psychologists Daniel Kahneman and Amos Nathan Tversky, were willing to refute this belief. But more on them later.
Let’s go back to Peter.
Considering that cognitive psychology and behavioral economics were still years away from providing some insights into the decision-making, we can assume that Peter built the Pricing Meter Sensitivity on false premises:
👎 False Premise #1. People are rational in their economic behavior.
👎 False Premise #2. They have a clear perception of value.
As a result, we have a Price Sensitivity Meter that is still used nowadays by SaaS companies and pricing teams.
To make Van Westendorp’s Price Sensitivity Meter work, you have to ask people via surveys and interviews the following four questions:
Next, you have to gather all the price points and add them to a line graph with the price on the x-axis and the number of respondents on the y-axis.
Then, you have to consider the intersections between the:
The space between your PMC and PME is your ideal pricing range.
Van Westendorp’s Meter seems like a rational and systematic way to identify the best pricing for your SaaS products. But it’s inaccurate and unreliable because of the human factor.
We like to think high about ourselves, believing we’re rational and calculated. However, as researchers showed, we’re highly irrational and unpredictable, especially when it comes to our economic behavior.
Remember Kahneman and Tversky I’ve mentioned earlier?
Amos Tversky was an Israeli cognitive and mathematical psychologist. In 1984 he was a recipient of the MacArthur Fellowship. In 1985, Tversky was elected to the National Academy of Sciences. In 2003 Tversky earned posthumously, as a co-recipient with Daniel Kahneman, the University of Louisville Grawemeyer Award for Psychology.
Daniel Kahneman is an Israeli psychologist and economist known for his work on the psychology of judgment and decision-making. One of the most outstanding awards Kahneman received was the Nobel Memorial Prize in Economic Sciences, in 2002, for the work he did in collaboration with Tversky.
Both researchers had a fruitful research collaboration, shading light on the psychology of decision making. As a result of their work together, Kahneman and Tversky proved that individuals and markets act irrationally.
In other words, the Homo Economicus who behaves perfectly rational doesn’t exist.
As the studies of Kahneman and Tversky showed, when faced with uncertainty, people don’t examine the information in ways one would characterize as rational.
On the contrary, we tend to take mental shortcuts that lead to illogical decisions.
Quick note: If you want to learn more about our irrational behavior, especially when making economic decisions, check out Kahneman’s book “Thinking, Fast and Slow.”
Thinking that someone can answer pricing and value questions, as presented through Van Westendorp’s Price Sensitivity Meter, lacks scientific ground.
Moreover, as researchers Hirak Parikh, Davide Baldo, and Kai-Markus Müller argue:
“The problem is that humans are bad at predicting their own behavior, which may or may not be intentional. Perhaps not always consciously, we often say one thing and do another. We want to believe one thing, yet want to give answers that sound “right” or are “what the surveyor might want to hear.” We are all familiar with the feeling that we simply cannot or will not say in words what we really feel. Price is not just a number. It comes along with a rich set of associations that affect how we value and perceive a product and its worth.”
Let’s take the subject a bit further.
As I previously mentioned, Peter created the Price Sensitivity Metric, thinking that people can perceive value correctly.
But do we?
For example, according to famous Canadian-American psychologist Paul Bloom:
“You can take the same wine and label it in different ways, and this affects how people, including experts, rate it.”
As Bloom notes:
“In one study, a Bordeaux was either labeled as a “grand cru classé” or as a “vin du table.” Forty experts said the wine with the fancy label was worth drinking, while only 12 said this of the cheap label. The grand cru was “agreeable, woody, complex, balanced and rounded,” while the vin du table was “weak, short, light, flat and faulty.”
People perceived the same wine differently only because of its label.
What makes us think that product description and presentation won’t affect the answers to the Price Sensitivity Meter’s questions?
Let’s say you want to find the sweet spot for pricing a Global Startup Database, and you prepare two product description versions:
👉 Version A. Access a complete database of startup ecosystems worldwide to learn the trends and make better decisions.
👉 Version B. World-class investors use our Global Startup Database to learn about the worldwide startup ecosystem and make multi-million dollar investment decisions.
Do you think the answers will be equal for both versions? Or will people tend to attribute more value to the second description and be willing to pay more for the product?
The answer is pretty obvious.
The value perception is subjective as it depends on multiple factors such as:
According to German author and entrepreneur Simon Hermann:
“The price a customer is willing to pay, and therefore the price a company can achieve is always a reflection of the perceived value of the product or service in the customer’s eyes. If the customer perceives a higher value, his or her willingness to pay rises. The converse is equally true: if the customer perceives a lower value relative to competitive products, willingness to pay drops. “Perceive” is the operative word. When a company tries to figure out the price it can achieve, only the subjective (perceived) value of the customer matters.”
Having this in mind, how reliable Van Westendorp’s Price Sensitivity Meter can be, especially if you’re using it to price your SaaS platform?