vplus+ improved price optimization model from. copyright © 2000 renaissance research &...
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VPlus+Improved Price Optimization Model
from
Copyright © 2000 Renaissance Research & Consulting, Inc.All Rights Reserved
WHAT IS VPlus+?
• A model for determining the best price for a good or service
• Based on Van Westendorp model
• Modified to improve administration and interpretation
The Van Westendorp Model
• Respondent is given a series of discrete price levels (e.g., $200, $300…)
• Asked to identify four price points with respect to the product or service in question
The Van Westendorp Questions
1. At what price is the product too cheap, so that you would question its quality?
2. At what price would you consider it so cheap that you wouldn’t hesitate to buy it?
3. At what price would you think it expensive, but would still consider it?
4. At what price would you think it too expensive to consider?
The Van Westendorp Model
• Cumulative distributions of the price points for the four questions are graphed
• Where the lines cross yield crucial prices:– The Indifference Price is the price at which the same number think
it’s a bargain as think it’s expensive– The Optimal Price is the price at which the same number think it’s
too cheap as think it’s too expensive (i.e., minimizes rejection)– The Lower Bound is the price at which the same number think it’s
too cheap as think it’s expensive– The Upper Bound is the price at which the same number think it’s
too expensive as think it’s a bargain
The Van Westendorp Model
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Price
Too Expensive Not A Bargain Not Expensive Too Cheap
IndifferencePrice
Optimal Price
LowerBound
Upper Bound
The Van Westendorp Model Has Two Principal Difficulties
• The “Expensive” question is ambiguous – people have difficulty responding– Results in inconsistent answers and ties– Distorts the resulting curves
• The model’s intersection points do not take the price itself into account– No measurement of “expected value” for a
given price
VPlus+ modifies the Van Westendorp model to overcome
these difficulties
VPlus+ assumes that a consumer’s decision space is
divided into ranges that depend on price
Price
REJECTToo Cheap
ACCEPTBargain
CONSIDER Expensive
REJECTToo Expensive
VPlus+ measures these ranges by asking three questions:
1. What is the highest price at which the product/service is too cheap: you would question its quality?
2. What is the highest price at which the product/service is a bargain: you would buy it without thinking about it?
3. What is the lowest price at which the product/service is too expensive: you would not even consider buying it?
Methodology
• Questions asked in order
• Respondent not allowed to use the same or lower price than the one used in a previous question
• Four cumulative distribution curves plotted– Three questions plus inverse of “Bargain”
Results
• Yields four Van Westendorp points, with one difference:– Indifference Price is the intersection of
“Bargain” and “Not Bargain” – that is, the price at which half the sample thinks the product is a bargain
VPlus+ Results
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Price
Too Exp Not Barg Bargain Too Cheap
Upper Bound
Indiff erence
Price
Optimal Price
Lower
Bound
VPlus+ Results
• In addition, VPlus+measures the expected value at each price point– Minimum Expected Value is the product of the
price and the percent accepting the item at that price
– Maximum Expected Value is the product of the price and the percent accepting or considering the item at that price
VPlus+ Expected Value Plot
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Pr ice
Min EV Max EV
Results
• The “Value Limits” of price are the prices that maximize Minimum and Maximum Expected Value– Lower Limit maximizes Expected Value from
Acceptors only– Upper Limit maximizes Expected Value assuming that
all Considerers convert– Minimum No-Risk Conversion Rate is the percentage
of Considerers that would have to convert for the Upper Limit price to produce the Lower Limit Expected Value
• Indicator of feasibility of Upper Limit
The VPlus+ Model
• Model is calculated in two versions– Discrete– Continuous
• Each version has advantages and disadvantages
The VPlus+ Model
• Discrete Model– Plotted directly from actual price points
– Intermediate prices interpolated
– Advantage:• Accurately reports irregularities in the response curve
(thresholds, discontinuities, etc.)
– Disadvantages:• Interpolation open to question
• No theoretical framework for prediction
• Cannot test group differences statistically
The VPlus+ Model
• Continuous Model– Curve calculated mathematically from price points
– Intermediate points predicted functionally
– Advantages:• Easier to generalize from
• Theoretical basis for interpolation
• Framework for testing subgroup differences statistically
– Disadvantage:• Smoothes out bumps in the price curve – ignores irregularities
and thresholds
The VPlus+ Model
• Because neither version is clearly the best in all circumstances, both are calculated, and the results compared– If the Discrete Model shows few irregularities
(or they don’t reflect real variation), then the Continuous Model is used
Discrete vs. Continuous Results
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Price
Too Exp Not Barg Bargain Too Cheap
Too Exp Not Barg Bargain Too Cheap
Note: Solid lines are discrete model, dashed lines are continuous model
VPlus+ Deliverable
• In Excel spreadsheet form – Complete statistics for each model on separate
pages, including optimum points– Chart of demand curves– Chart of Expected Value
