Price Elasticity Models, a Particular Approach

There are various appropriate applications that address price elasticity, these include conjoint and its special case trade-off analysis. There also is the van Westendorp Price Sensitivity Model.

In this model, price sensitivity relates not to absolute price, but rather to perceived value of the product and service. Consumer price expectations and tolerances are measured by asking a set of price perception questions. These questions are the key to the model - the price at which the product or service is … 

• So cheap that product quality is questionable (Too Inexpensive)
• A bargain (Inexpensive)
• Beginning to seem too expensive  (Expensive)
• Too expensive to consider (Too Expensive) 

In addition to these "required" points of interest, it is common to append questions as to purchase intent and perception of value. This might involve either an unaided [no price point defined, based solely on the concept] or aided question set measured at the highest and lowest prices in the range of pricing options. The optimal price (i.e., the price at which market share and revenue are optimized) can then be computed.

The responses to the above four questions are graphed. The point at which the Inexpensive and Expensive responses intersect is considered the Indifference Price Point (IDP); the point at which the Too Inexpensive and Too Expensive responses intersect is considered the Optimal Price Point (OPP).

IDP is where "cheap" and "expensive" curves cross. At this point, as many people consider the product or service cheap as consider it expensive. This represents the "normal" price in the market. At this point, we have maximized the percentage of respondents whose "normal" range we are in.  

OPP is where "too cheap" and "too expensive" cross. At this point, the number of respondents finding the price acceptable is maximized and the resistance (in the form of unacceptability) to price changes is minimal.