Price Sensitivity Meter (PSM) is a method of determining a demand oriented price for a product through consumer research. PSM starts with four basic price point considerations, namely expensive, too expensive, cheap and too cheap. Consumers are asked the following four questions:
- What are the price points where consumers consider a product so expensive that they won’t buy it? (Too expensive)
- What are the prices points where the price of this product is considered so low that they’ll doubt its quality? (Too cheap)
- What are the price points where they consider the product starting to get expensive? (Expensive)
- What are the price points where the product is considered a great buy for the money? (Cheap/Inexpensive).
This is the doctrine of the questions used by many researchers. These questions are often asked with the help of show cards. This done by using some pre-determined price ranges where respondents have to select a specific price in response to each question. The answers provided by respondents are then compiled. The information is then grouped into frequency distributions. Each of the questions mentioned above has its own line on the graph. The vertical axis comprises the percentage of respondents; whereas, the price points are on the horizontal axis.
- The point at which too cheap and expensive lines intersect is called Point of Marginal Cheapness (PMC). It is the point at which the number of consumers believing that the product is expensive is equal to those believing it is too cheap. This is the lower limit of acceptable price range.
- The point at which too cheap and too expensive lines intersect is called Optimal Price Point (OPP). The point at which the number of respondents who believe the product is too expensive is equal to those who believe it is too cheap. OPP is optimal, in the sense that the price sensitivity to the product for being cheap is equal to that of being too expensive, and is often the recommended price.
- The point at which expensive and cheap lines intersect is called Indifference Price Point (IPP). The point at which an equal number of respondents believe the test product is expensive that it is inexpensive. The IPP generally reflects either the median price actually paid by consumers already in the market or the price of the product of a market leader.
- The point at which too expensive and cheap lines intersect is called Point of Marginal Expensiveness (PME). It is the point at which the number of respondents who believe that the test product is too expensive is equal to those who believe it is cheap or inexpensive. This is the upper limit of acceptable price range.
One thing to note is that competitive products will rarely be priced outside the acceptable price range (between PMC and PME) in a given category. Following price strategies can be developed based on PSM:
- If the aim is a healthy balance of revenue and market share, then, the price should be set as closely to OPP as possible.
- If the goal is to maximize market share or penetration, price should be somewhere between PMC and OPP.
- If your goal is to maximize revenue, or “skim the market” price should be set somewhere between OPP and PME.