Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.
Understanding price sensitivity
Price sensitivity helps a business with one of the most difficult tasks it will encounter: the striking of a balance between selling its products at a price consumers can afford while making a profit at the same time.
High price sensitivity indicates that consumers are more likely to reject purchasing a product in favor of another product.
Low price sensitivity, on the other hand, indicates that consumers are willing to pay the stated price and may even be willing to pay more.
Read Next: Price Elasticity.
Factors that influence price sensitivity
Understanding the machinations of the consumer mind when faced with a purchasing decision is critical if a business is to price its products appropriately.
With that in mind, here are some of the many factors that influence price sensitivity:
Price and quality
Buyers are less sensitive to price if the product is of superior quality or a status symbol, such as a luxury car or designer watch.
Uniqueness
Price sensitivity also depends on whether the product or brand is unique. A consumer is likely to be less sensitive if purchasing a pair of Air Jordans because they cannot be substituted with something else.
However, the consumer purchasing a loaf of bread will be more sensitive to price because there are many alternative brands.
Ease of comparison
If a product can be easily compared with similar products in the marketplace then price sensitivity tends to be higher. This is related to uniqueness.
Reference price
When comparing similar products from multiple merchants, consumers form a reference price based on their observations and comparisons. Provided the products are more or less the same, the consumer may be more willing to choose a product based on price.
Available income
Price sensitivity also increases when consumers have less money in the bank, whether that be due to personal circumstances or broader economic factors such as a recession.
This is especially true of more expensive items.
How can businesses measure price sensitivity?
For best results, the business should have a deep understanding of the various market segments within its target audience.
Each will perceive the value of a product differently, which means their price sensitivity will also differ.
Once the audience has been segmented, the business needs to move beyond the simple question of “How much would you pay for this product?”
In practice, this can be done in several ways.
Price ladder method
This involves asking potential customers about their intention to purchase a specific product at a specific price on a scale of 1 to 10.
If the customer reports an intention to buy below a particular threshold, then the price is considered low and they are asked if they intend to purchase again in the future.
Data analysis can also be performed to evaluate the percentage of the market that would buy at any given price point.
Van Westendorp model
Named after Dutch economist Peter van Westendorp, this method asks a series of questions to identify critical psychological price points and gauge consumer purchasing power.
Importantly, the method is based on real-world market data.
It can be adapted according to whether the business plans to introduce a pricing change or wants to determine consumer perception of its products with respect to competitors.
Gabor-Granger method
The Gabor-Granger method was developed in the 1960s by economists Clive Granger and Andre Gabor.
The method is a convenient and practical survey method where participants are introduced to a product and then exposed to a random price chosen from a predetermined list.
If the participant is willing to buy the product at that price, they are shown the product again with a higher price attached.
This process is repeated until the highest price a participant is willing to pay is determined. In some cases, the price may need to be lowered on multiple occasions until an agreeable price is reached.
Key takeaways
- Price sensitivity is the degree to which the price of a product affects consumer purchasing behavior. High price sensitivity indicates that a consumer is more likely to choose an alternative product, while low price sensitivity indicates that the consumer is willing to pay the stated price or maybe more.
- Price sensitivity can be understood by considering the machinations of the consumer’s mind when making a purchasing decision. Indeed, they may be weighing up price, quality, uniqueness, ease of comparison, reference price, and available income.
- The price sensitivity of various market segments should be analyzed for best results. Analysis techniques include the price ladder method, Van Westendorp model, and Gabor-Granger method.
Key Highlights
- Price Sensitivity and Price Elasticity of Demand: Price sensitivity is the degree to which changes in the price of a product impact consumer purchasing behavior. This concept is closely related to the price elasticity of demand, which quantifies the responsiveness of demand to changes in price. If demand changes significantly in response to price changes, the product is considered price-sensitive.
- Balancing Affordability and Profit: Price sensitivity is essential for businesses to find the right balance between making products affordable for consumers while also generating profits for the company. Striking this balance is a crucial challenge for businesses, as they need to cater to consumer preferences and financial constraints while ensuring their own financial sustainability.
- High vs. Low Price Sensitivity: When consumers exhibit high price sensitivity, they are more likely to reject a product if its price is relatively high, opting for alternatives that offer better value. On the other hand, low price sensitivity suggests that consumers are willing to pay the listed price or even more due to factors like brand loyalty, product quality, or perceived uniqueness.
- Factors Influencing Price Sensitivity: Several factors influence how sensitive consumers are to changes in price:
- Price and Quality: Consumers may be less sensitive to price if the product is of high quality or holds status, such as luxury goods.
- Uniqueness: Products that are unique or not easily substituted tend to have lower price sensitivity.
- Ease of Comparison: Products that can be easily compared with alternatives tend to have higher price sensitivity.
- Reference Price: Consumers establish a reference price through comparisons, affecting their price sensitivity.
- Available Income: Economic conditions, personal circumstances, and available income influence price sensitivity, particularly for expensive items.
- Measuring Price Sensitivity: To effectively address price sensitivity, businesses need to understand the price points that resonate with different segments of their target audience. This involves employing various measurement methods to assess consumer behavior and preferences:
- Price Ladder Method: In this method, potential customers are surveyed to determine their intention to purchase a product at different price points. The data collected helps identify the price range that resonates with the audience.
- Van Westendorp Model: Named after Peter van Westendorp, this model gauges consumer perception of critical price points and purchasing power. It uses real-world market data to analyze pricing scenarios.
- Gabor-Granger Method: Developed by economists Clive Granger and Andre Gabor, this survey-based method exposes participants to a product at various prices. By observing willingness to purchase at different price levels, businesses can determine the optimal price point.
- Key Takeaways:
- Price sensitivity measures the extent to which changes in price influence consumer purchasing behavior.
- High price sensitivity indicates consumers are likely to reject a product due to high prices, while low sensitivity means they are willing to pay the listed price or more.
- Factors influencing price sensitivity include product quality, uniqueness, ease of comparison, reference price, and available income.
- Measuring price sensitivity requires understanding different market segments and using methods like the price ladder, Van Westendorp, and Gabor-Granger to assess consumer behavior and preferences.
Read Next: Price Elasticity.
Read Also: Pricing Strategy.
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