.png)
Estd 4.22.2023
Decoding the Pricing Puzzle: Why Scientific Approaches Matter
Setting the right price for your SaaS solution is perhaps one of the most consequential decisions you'll make. Price too high, and you'll struggle to acquire customers; price too low, and you'll leave revenue on the table while potentially devaluing your offering. According to a McKinsey study, a 1% improvement in pricing can result in an 11.1% increase in operating profit—making pricing optimization one of the highest-ROI activities for any SaaS business.
Yet despite these high stakes, many executives rely on gut feeling, competitor benchmarking, or simplistic cost-plus models when making pricing decisions. This article explores two scientific methodologies that can transform your pricing strategy from art to science: Van Westendorp's Price Sensitivity Meter and Conjoint Analysis.
Van Westendorp Analysis: Understanding Psychological Price Thresholds
What Is Van Westendorp Analysis?
Developed by Dutch economist Peter van Westendorp in 1976, the Price Sensitivity Meter (PSM) is a market research technique that identifies key psychological price thresholds by directly asking consumers about price acceptability. The method asks four critical questions:
- At what price would you consider the product/service to be too expensive? (Too expensive)
- At what price would you consider the product/service to be so expensive that you would not consider buying it? (Too expensive to consider)
- At what price would you consider the product/service to be a bargain? (Bargain)
- At what price would you consider the product/service to be so cheap that you would question its quality/credibility? (Too cheap)
Interpreting the Results
The answers to these questions are plotted on a graph to identify four critical price points:
- Point of Marginal Cheapness (PMC): The price below which consumers begin to question quality
- Point of Marginal Expensiveness (PME): The price above which consumers begin to consider the product expensive
- Optimal Price Point (OPP): The price at which the same percentage of respondents rate the product as "too cheap" and "too expensive"
- Indifference Price Point (IPP): The price at which the same percentage of respondents rate the product as "expensive" and "a bargain"
The range between PMC and PME is your "acceptable price range," while the OPP represents a theoretically ideal price point.
When to Use Van Westendorp
Van Westendorp is particularly valuable for:
- New product/service launches where no market benchmarks exist
- Significant product upgrades requiring price recalibration
- Market entry strategies in diverse geographic regions
- Understanding price elasticity within your target market
According to research by Price Intelligently, SaaS companies that implement PSM see, on average, a 30% higher customer lifetime value compared to those using intuition-based pricing.
Conjoint Analysis: Determining Value Attribution
What Is Conjoint Analysis?
While Van Westendorp helps establish psychological thresholds, Conjoint Analysis goes deeper by determining how much value customers place on specific features or attributes of your product.
Conjoint Analysis presents survey respondents with different product configurations (varying features, service levels, and prices) and asks them to make choices or rank their preferences. Statistical analysis of these choices reveals:
- The relative importance of each attribute
- The value (or "utility") customers place on specific levels within each attribute
- Price sensitivity for different market segments
- Optimal feature-price combinations
Types of Conjoint Analysis
Several variants exist, each with specific advantages:
- Choice-Based Conjoint (CBC): Simulates real-world purchasing scenarios by asking respondents to choose between product profiles
- Adaptive Conjoint Analysis (ACA): Adapts questions based on previous responses to focus on attributes most relevant to each respondent
- Menu-Based Conjoint: Particularly useful for SaaS, this allows respondents to "build their own" product by selecting features at various price points
Real-World Application
Salesforce utilized conjoint analysis when restructuring their enterprise pricing tiers. According to their published case study, this approach led to a 25% increase in average contract value while maintaining similar conversion rates—demonstrating how understanding value attribution can unlock significant revenue.
Combining Both Methodologies for Maximum Impact
The most sophisticated pricing strategies employ both methodologies sequentially:
- Use Van Westendorp to establish the overall acceptable price range and identify psychological thresholds
- Deploy Conjoint Analysis to determine optimal feature groupings and precise price points within that range
- Segment results by customer type, size, industry, or other relevant factors
Atlassian exemplifies this approach. According to their pricing team, they first used Van Westendorp to establish pricing ranges for their project management tools, then applied conjoint analysis to optimize their tiered pricing structure. This contributed to their impressive 34% year-over-year revenue growth in 2021.
Implementation Best Practices
Sample Size Considerations
For statistically significant results:
- Van Westendorp typically requires 200-400 respondents
- Conjoint Analysis needs 300-600 respondents, potentially more if testing many attributes
Question Design
The quality of your results depends entirely on question design:
- Use clear, unambiguous language
- Provide sufficient context for respondents
- Pre-test surveys with a small group before full deployment
- Consider using professional research firms for survey design
Segmentation
Price sensitivity often varies dramatically across segments. Analysis should be segmented by:
- Company size/ARR
- Industry vertical
- Geographic region
- Current vs. prospective customers
Common Implementation Pitfalls
Research by Pricing Solutions identifies several common mistakes when implementing these methodologies:
- Neglecting qualitative research: Always begin with qualitative interviews to inform survey design
- Including too many attributes in conjoint studies: Keep to 6-8 key attributes to avoid respondent fatigue
- Focusing exclusively on price: These methods evaluate price in the context of value—don't lose sight of the value proposition
- Implementing results without testing: Always A/B test findings before full implementation
Conclusion: From Research to Action
The data derived from Van Westendorp and Conjoint Analysis provides a scientific foundation for pricing decisions, but implementation requires careful consideration of broader business objectives. The most successful SaaS companies use these insights to:
- Develop tiered pricing structures aligned with customer willingness-to-pay
- Create feature groupings that maximize perceived value
- Identify high-value features for upsell opportunities
- Establish price fences that enable segmented pricing
According to OpenView Partners' SaaS Benchmarking Survey, companies that employ systematic pricing research methodologies achieve 13-26% higher growth rates compared to those that don't.
By transforming pricing from guesswork to science, you position your SaaS business to capture maximum value while maintaining competitive market positioning. In an increasingly competitive landscape, this scientific approach to pricing may well be your most powerful lever for sustainable growth.