How do you choose what to charge for your goods and services, and how much will buyers pay? Find out what factors influence customer price sensitivity and learn about tools and strategies for achieving the right balance.
What is Price Sensitivity
Price sensitivity is the extent to which a product’s price influences how buyers behave while making purchases. In general, it is how demand fluctuates as product prices change.
Take selling cupcakes as an illustration. Customers who instantly start going to the bakery down the street instead of yours after raising the price of a cupcake by £0.10 are showing significant price sensitivity.
Sensitivity to price varies widely. It is affected by the types of products and services you offer, the customers you have, and market-wide variables, including social and economic trends.
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In economics, the price elasticity of demand, or the measurement of the change in demand based on an item’s price change, is frequently used to assess price sensitivity. For instance, some customers are unwilling to spend a few cents more per gallon of petrol, especially if a station with a lower price is close by.
Businesses and product producers can make informed decisions about goods and services when they research and evaluate price sensitivity.
Price Sensitivity: An Overview
Price sensitivity is essentially the degree to which demand fluctuates in response to changes in a product’s or service’s price.
A product’s price sensitivity depends on how much weight buyers give price in comparison to other selection factors. Some people would prefer quality over price, which makes them less sensitive to pricing.
Customers interested in high-end goods, for example, are frequently less price-sensitive than consumers seeking discounts, and as a result, they are willing to pay more for high-end goods.
People who are more sensitive to price may, nevertheless, be willing to compromise on quality. Even if a store brand product is of superior quality to a brand name product, some people won’t pay more for it.
From one person to the next, or from one consumer to the next, price sensitivity differs. Certain people can and will spend more money on products and services than others. Governments and corporations are also able to make larger payments than private citizens.
However, even one person can have varying price sensitivity for various purchases. For instance, a person might price shop when purchasing paper towels, yet prioritize quality over price when purchasing dining room furniture.
Price sensitivity and elasticity of demand
According to the law of demand, if all other market variables stay the same, an increase in the relative price causes a decrease in the amount sought.
Consumers are more likely to purchase a product even when the price goes up when demand is inelastic. High elasticity suggests that demand may be dramatically reduced even by tiny price increases.
In an ideal world, companies would set prices at the precise point where supply and demand combine to generate the highest level of profit. The equilibrium price is what we are talking about here. Equilibrium prices can be difficult to estimate, but computer software models and real-time analysis of sales volume at specific price points can help.
Even though a tiny price increase reduces sales volume, a proportionately smaller reduction in customer spending may be more than offset by comparable revenue gains.
What influences price sensitivity?
Although there are numerous price sensitivity factors, the following are some of the most common ones.
Reference price
Customers can shop around among rival vendors in a crowded market to find the best offer. As a result of their observations and comparisons, they will have in mind a price reference—a basic idea of the “going rate” for something.
If the pricing is sufficiently like-for-like and there are several businesses offering the same kinds of items, consumers may be more willing to switch suppliers.
Businesses can help set the reference point by harnessing the power of price anchoring. This type of cognitive bias occurs when a thing’s price appears high or low in comparison to other prices.
If you’ve ever paid for a subscription or service that is offered in tiers, you’ve probably experienced this: even if you didn’t mean to spend any money at all, your “Basic” £25 subscription seems affordable in comparison to a “Gold” or “Platinum” package at £100.
Product or service type
There are some product and service categories that are by definition more sensitive than others. Examples include things like bread, milk, fuel, and toothpaste, as well as other basics for work and daily life.
Regardless of the state of the economy, you can count on the demand for these products to remain stable. However, consumers may become more price sensitive during hard times as they attempt to acquire the best deal on these necessities.
On the other hand, certain items exhibit high price elasticity of demand because their demand is more influenced by non-essential characteristics like quality, brand, or style. These could include activities like going to the movies, trips, designer apparel, and expensive cars.
available money
Price sensitivity is certain to rise when there is less money in the bank, particularly for more expensive things. Both an individual level and a social level, such as during a recession, can be affected by this aspect.
Product uniqueness
If a company has a monopoly on the market, such as a patented device or formula that no one else can duplicate, a customer may be more forgiving of price hikes. This is particularly true in the case of necessities like medicine or healthcare. If only one company provides it, you will pay the full price because there is no other option.
When the brand connected with a product is very strong, uniqueness comes into play. Brand-based uniqueness makes it more difficult to compare things and determine a reasonable like-for-like reference price.
A pair of Nike sneakers, for example, is less likely to be exchanged for a generic pair of sneakers than a liter of milk from Supermarket A is to be exchanged for a cheaper one from Supermarket B.
Customer behavior
The level of price sensitivity varies greatly among people. Whereas one person may base their decision solely on price, another may additionally consider quality, appearance, durability, and brand reputation and, as a result, be less price-sensitive.
Depending on a person’s temperament, ideals, and life experiences, the significance of other demand elements will influence price sensitivity.
Methods for lowering price sensitivity
If price is our key differentiator, we may utilize our understanding of other demand drivers as levers, increasing those effects to lessen price sensitivity or weakening them to enhance it.
(If your product is the most affordable on the market, you may use the question “Why pay more?” in your messaging.)
There are several approaches to lessen the impact of price on your consumers’ purchasing decisions, including building your brand, improving the customer experience, leveraging marketing and change-related fears, making items blatantly distinctive, and emphasizing quality
How Is Price Sensitivity Calculated?
By dividing the percentage change in quantity demanded by the percentage change in price, one can determine the price sensitivity of a product. If a 30% price increase for a soda drink causes a 10% drop in purchases, for example, the item has a price sensitivity of 0.33%.
One of the most crucial choices you’ll have to make before launching your goods and services is choosing their price point. Therefore, it makes sense to devote time and money to price sensitivity studies and do the extensive market, customer, and competitor research beforehand.
Which Products Are Price Sensitive?
In general, the goods that are most sensitive to price are those that face a lot of competition and don’t offer much in the way of superiority or status. Given that these purchases account for a sizeable percentage of the buyer’s budget
price sensitivity might also become an important aspect when it comes to higher-priced products. Even a 2% increase in a beloved cereal brand might not be noticed. However, if you add that same percentage to a pricey item, it’s more likely that the customer will look for less expensive options.
Summary
How much money businesses and employers make from operations and consumer spending depends on price sensitivity. That makes it an essential element of the economy and something that is definitely worth monitoring.
