GfK HealthCare September 2011
	Getting the Price Right (Part II): Willingness-to-Pay Research Using Direct Price Questioning Techniques By Marco Rauland, Ph.D., Head of Pricing & Market Access In the June issue of Pipeline, we discussed the direct price questioning techniques using predefined price points. This article will deal with direct price questioning methodologies without any aid on price points. Van Westendorp/Price Sensitivity Meter The Price Sensitivity Meter (PSM) was introduced in 1976 by the Dutch economist Peter van Westendorp and has been used by a wide variety of researchers in the market research industry. The Van Westendorp/PSM technique is based on four questions: At what price would you consider the product to be priced so low that you would feel the quality is questionable? (‘Cheap’ / ‘Too inexpensive’) At what price would you consider the product to be reasonably priced − providing good value for money? (‘Inexpensive’) At what price would you consider the product to be expensive but you would still prescribe/buy/recommend the product? (‘Expensive’) At what price would you consider the product to be so expensive that you would not consider prescribing/recommending/buying it? (‘Too expensive’) For the analysis, responses from the questions are used to calculate cumulative frequency distributions for each question with the four distributions plotted as price points versus percent of respondents. (Note that the standard method requires that two of the four cumulative frequencies must be inverted – ‘too cheap’ and ‘inexpensive’ – in order to obtain four intersecting points; see Graph 1 below). Graph 1: The graphical Van Westendorp analysis The resulting intersections of the cumulative frequencies for each of the four price categories are generally interpreted as follows, although there are no uniform definitions for the intersections: Table 1: Van Westendorp Graphical Analysis – Interpretation of Intersections   Inexpensive Too cheap Expensive The indifference price point (IPP) is the point at which an equal number of respondents believe the test product is expensive as believe it is inexpensive: Often interpreted as the average market price or, if there is a market leader with a predominant share, the price of this product The point of marginal cheapness (PMC) is the point at which an equal number of respondents believe the product is expensive as believe it is too cheap: Lower bound of an acceptable price range where respondents question the product’s quality Too expensive The point of marginal expensiveness (PME) is the point at which an equal number of respondents believe the test product is too expensive as believe it is inexpensive. Upper bound of an acceptable price range where respondents view the product as outside their means The optimal price point(1) (OPP) is the point at which an equal number of respondents believe the product is too expensive as believe it is too cheap: Equilibrium price between not buying the product and doubting its quality One other important value can be derived from the Van Westendorp graph: The range between the PMC and the PME, which defines the optimal price band for the test product and which is the price range the focus should be on (see Graph 1). An alternative way to ‘read’ the Van Westendorp graph It is important to note that the interpretations of the intersections derived from the graphical plotting of the Van Westendorp questions have neither a solid theoretical foundation(2) nor any history of predictive success for pharmaceutical products. Thus, an alternative (and more comprehensible) way to analyze the Van Westendorp graphs for pharmaceuticals products is as follows: Just ask for the ‘inexpensive’, ‘expensive and ‘too expensive’ price points. (The quality of a medical product/drug has been approved by regulatory authorities and asking this questions leads rather to irritations specifically with life-saving medications. Exception: Generics where respondents, in particular patients, may doubt the quality if the price is too low.) Use the plotted cumulative frequencies for price threshold analysis. (At which price drop the number of respondents who consider the price as ‘acceptable’ and ‘expensive’ considerably?) Use the plotted cumulative frequencies for price sensitivity analysis. (Rule: The closer the lines for ‘expensive’ and ‘too expensive’ lie next to each other, the more price sensitive are the respondents.) Graph 2: An alternative way to analyze the Van Westendorp graph In the above illustrated example (Graph 2) are several relevant price thresholds: At a price of 7.5 € the percentage of respondents who consider this price as inexpensive drops from 90 percent to 50 percent. If the price exceeds 10 €, it leads to a further ‘acceptance loss’ down to only 10 percent of respondents who consider the price as inexpensive. The ‘expensive’ line shows a similar picture: At a price of 7.5 € the percentage of respondents who consider this price as expensive increases considerably from 10 percent to 40 percent with another increase to 70 percent at a price of 10 €. Thus the product should be priced in the range of 7.5 € to 10 €. As the distance between the ‘expensive’ and ‘too expensive’ line is quite big, the product can potentially be priced at the higher end (i.e., at 10.0 €). As the above mentioned Van Westendorp questions do not give any information on demand (the original set of questions focuses on price only), extensions to the original Van Westendorp technique have been developed to address this problem and estimate volume/revenue(3). For this extended analysis the following questions need to be added to the ‘inexpensive’ and ‘expensive’ price questions: Physicians: To how many of your patients would you prescribe the product at the acceptable/expensive price you stated? Patients: How likely would you buy the product at the inexpensive/expensive price you stated? For Payers the following questions should be asked in conjunction with the price questions: How likely would you reimburse/list the product at the inexpensive/expensive price you stated? Would you place any restriction on usage on the product at the expensive price you stated? Overall, the Van Westendorp/PSM is useful for exploratory research to get a first idea of acceptable price ranges, but it is rather risky to base a price decision only on its results without additional pricing methodologies/research. Van Westendorp/PSM Strengths Simple to write and administer Gives valid indications for the potential price range and price threshold values With extended Van Westendorp approach price/demand functions can be derived There is no need for a predefined price range and therefore price range is unlimited (no risk of losing information on a higher or lower price point as pre-defined) Weaknesses Competitive environment is only considered implicitly Quite difficult to interpret Results are influenced by price awareness of respondents (Note: Price information cards can provide price awareness for all respondents to reduce the influence of different levels of price knowledge) Limited information on price elasticity (interpretation only based on size and shape of the curve area) Open Scale Technique A very simple but quite efficient way to determine the pricing opportunities of a product with explicit consideration of the competitive environment is a benefit assessment combined with a price acceptance evaluation. In the first step the respondents are asked to rate and rank the currently available products (e.g., the available treatment options for the target indication) in terms of their therapeutic benefit on an open scale (if the interviews are performed over the phone the value assessment can be conducted by using a 10- or 100-point scale alternatively). After presenting the test product (normally via a product description), respondents are asked to rate the value of the test product on the same scale used before including the previously conducted benefit assessment of the competitive products. This assessment indicates the comparative benefit perception of the test product in the competitive environment (see Graph 3 for an illustrative outcome example; in this example the benefit of the test product is the highest compared to the existing therapies). Graph 3: Comparative therapeutic benefit assessment In the second step respondents are asked to rank the competitive products in terms of their therapy costs (this is done as a benefit assessment of the currently available products prior to presenting the description of the test product). After the test product has been presented respondents are asked to state their price acceptance for the test product on the same scale. In a variation the respondents are asked to state the acceptable price and the maximum price they would accept/they are willing to pay/accept for the product − similar to the ‘inexpensive’ and ‘expensive price’ points in a Van Westendorp approach as discussed before. (Note: For this willingness-to-pay assessment in the competitive environment the benefit assessment conducted before should not be shown to the respondents.) Graph 4: Willingness-to-pay using an open scale In the displayed example the test product was rated as providing the highest therapeutic benefit which is in line with the price acceptance and thus indicates the possibility of charging a premium for the test product (compared to Product C). ‘Value for Money’ Assessment The results of the competitive value assessment rating can be combined with the respective therapy costs for a more accurate ‘Value for Money’ analysis to determine the comparative value-based pricing opportunities for the test products. For this analysis either the perceived therapy costs (obtained during the survey as described before) or, for an even more realistic analysis, the actual (de facto) prices of the competitors are mapped with the ratings of the value assessment. The mapping shows the price/value positioning of the products in the market and the potential pricing options for the test Product X (see Graph 5 for an illustrative example of a ‘Value for Money’ analysis). Graph 5: Value for Money Correlation analysis The very simple underlying rule for the assessment of the (comparative) value-based pricing opportunities is that value drives price acceptance: The higher the (comparative) value of a product the higher the (comparative) pricing opportunities(4). As a golden rule, benefit and cost should be well balanced in the market to ensure a high utilization rate. In the above presented illustrative example Competitor A provides a comparably low therapeutic benefit and is priced accordingly (comparably) low. Competitor C provides (currently) the highest therapeutic benefit associated with the highest therapy costs. However, considering the extrapolated benefit/cost ratio of Competitor A, product C is priced somewhat too high in relation to Competitor A (but without the availability of an alternative with a similar or higher benefit a price reduction for Product C is not necessary). In contrast, Competitor B provides an average benefit but is priced quite high compared to Competitor A and C (i.e., Competitor B does not provide as sufficient value/money ratio as the two other competitive products). Product X, the test product, was rated as providing the highest benefit in the benefit assessment exercise and hence can be priced parity or even at a premium to Competitor C considering the comparative ‘value for money’ of both product A and C (see Graph 5). In general, when the (therapeutic) benefit assessment of a product is higher compared to the alternatives, then price becomes less of an issue: A product with above-average performance can potentially achieve a premium A product with an average performance with a very low price would be considered as providing a very good value for money and may force competitors to lower their prices Value for Money’ Analysis Strengths Simple to write and administer If de facto prices are used: Hides the fact that pricing is being tested Competitive environment is considered explicitly No order, no number of prices, no price range effects as with direct price-questioning techniques such as Gabor-Granger or price laddering Weaknesses No information on price elasticity or price/demand, price/volume No information on price drivers In summary, direct price-questioning techniques without any aid on price give valid information regarding the potential price range for a product and thus should be used for exploratory research. In contrast, direct price-questioning techniques with predefined price points help to fine-tune the optimal price point. Ideally, direct price-questioning techniques should be combined with an indirect price-questioning technique such as a conjoint/discrete choice exercise as indirect methodologies do not focus on price only and hence reflect product choice more realistically. The golden rule for a successful pricing strategy: Never base your pricing strategy on a single methodology. References: The OPP is sometimes interpreted as an optimal price (obviously because of the name), but this is incorrect. The Van Westendorp Price Sensitivity Meter is a method for determining the optimal range of prices for a product, i.e., it provides a price range and not the optimal price. What, for example, is the rationale that the price, where an equal number of respondents believe the test product is too expensive as believe it is expensive, is the maximum price for the product? E.g. Newton, Miller Smith (NMS) or Martin Rayner Interpolations (MRI) This analysis is similar to the ‘efficiency frontier’ analysis introduced by IQWiG, the German HTA body Want to learn more on this topic? Please contact:

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