price-sensitivity

What Is Price Sensitivity? Price Sensitivity In A Nutshell

Business / By / January 5, 2022

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.

Read Next: Price Elasticity.

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