Full Answer
What is price sensitivity and why does it matter?
What Is Price Sensitivity? Price sensitivity is the degree to which the price of a product affects consumers' purchasing behaviors. Generally speaking, it's how demand changes with the change in the cost of products.
How do you measure price sensitivity?
In economics, price sensitivity is commonly measured using the price elasticity of demand, or the measure of the change in demand based on its price change.
How do businesses separate consumers based on their sensitivity to prices?
These factors will separate consumers based on their sensitivity to prices. Businesses may use marketing and advertising techniques to get consumers to shift their focus from price to other factors, such as product offerings, benefits, and other values. This is common in the travel, tourism, and hospitality industries.
Which products are less sensitive to price than others?
Similarly, products that are addictive or placed higher in the consumer’s habits are also less sensitive to price, and we could take up cigarettes or alcohol as examples. One more widely observed phenomenon is the buyer’s perception of the quality of the product concerning the price paid.
What is price sensitivity?
Price sensitivity is the way in which the cost of a product affects consumers' purchasing decisions. Learn more with this article.
Why is price sensitivity important?
For organizations, price sensitivity is a crucial factor in making the best decisions and assigning the ideal prices, so it is essential to understand the consumer’s mindset and behavior.
How is price sensitivity measured?
Price sensitivity is commonly measured using the price elasticity of demand or the measure of the change in demand as a function of its price change.
What is price laddering?
Price laddering involves asking potential customers about their intention to buy a specific product at a particular price, usually ranked on a scale of 1 to 10. If the respondent’s intention to buy response is below a particular threshold (usually 8), then the price is low, so he or she is asked if he or she intends to buy again.
What factors can increase or decrease price sensitivity?
Brand perception:Loyalty to particular brands can become a significant factor that can increase or decrease price sensitivity.
What is price sensitive when making a decision?
Expense:If the product requires a huge expenditure or involves high cost, the buyer tends to be price sensitive while making a decision.
What is the bottom line benefit of a product?
Bottom line benefit:If the utility of the product is high for the buyer and efficiently meets the purchase objective, then he is less concerned about the price.
What is price sensitivity?
Price Sensitivity, also known and calculated by Price Elasticity of Demand, is a measure of change (in percentage term) in the demand of the product or service in comparison to the changes in the price, and is used widely in the business world to decide the pricing of a product or in cases of studying consumer behavior.
How to Calculate Price Sensitivity?
The formula for calculating Price Elasticity is generally used to calculate Price Sensitivity and is mentioned as follows:
Why is demand and price relationship important?
Wrapping up, this concept is quite popular and useful in the business world because of its delineation of demand and price relationship to understand the consumer behavior, sensitivity, and value creation, and helping companies to launch or amend product prices or to create a valuable product or service to fit perfectly in the demand and price matrix.
How much of the demand for a service is affected by price changes?
So, it is evident that the consumers are sensitive to price changes, and one percent of price change could affect 40% of the demand for the service. Let’s assume that an FMCG company changes the price of orange juice, on of its brands, from $50 to $75, and the company observes a decrease in the demand of the product by 40% for that particular quarter. Calculate the price sensitivity of the product of the company.
What is the perception of the buyer upon the quality of the product in relation to the price paid?
One more widely observed phenomenon is the perception of the buyer upon the quality of the product in relation to the price paid. If a consumer or buyer perceives the quality of the product would be better, in case of higher rates, the sensitivity of such a product would below. In the case of mobile phones, where the offering of features increases with the price, it could be a fitting example.
What does change in price mean?
Change in Price means the increase/decrease in the price of the same product in comparison to its earlier price.
What factors determine price sensitivity?
One of the most significant factors in deciding the price sensitivity of a product is its perceived value and competition. If the product is facing intense competition by the exact, similar, or substitute products, then it will have the highest sensitivity.
What is price sensitivity?
Pice sensitivity is used to evaluate the way particular price points impact consumer purchasing behavior. Subsequently, being aware of the price sensitivity level for products in their portfolio, retailers can evaluate the percentage of sales that will be gained or lost at certain price points. Sustainable price sensitivity management implies setting prices that would both meet customer expectations and generate the expected level of revenue.
Why does price sensitivity matters?
The majority of retailers are more or less frequently facing the situation when good products are ignored by consumers even though their price appears to be relevant and justified. Most often, the poor sales in such cases are the result of a too high price sensitivity which was not considered appropriately by the pricing and category management teams. What it means is that timely evaluation and effective management of price sensitivity is one of the crucial factors impacting retailers' financial health.
What are the three pillars of price sensitivity management?
To sum up, brand perception, personalized shopping experience, and communication with customers are the three pillars underlying the effective and sustainable price sensitivity management.
What does it mean when a product has a high price sensitivity?
High price sensitivity means that customers are likely not to buy a product as they consider it to be unreasonably overpriced by the seller. The price increase for products with high sensitivity is, therefore, a measure of last resort.
How to evaluate how customers value one or another product?
Social media or in-store polls are a good way to evaluate how customers value one or another product. Track customers' online activities. For e-commerce retailers, the analysis of visitors' online behavior and, especially, conversion rate might be particularly insightful in terms of evaluating price sensitivity.
When was price sensitivity meter invented?
The price sensitivity meter is another popular approach developed by Dutch Economist Peter van Westendorp in 1976 to measure price sensitivity by means of asking customers a set of specific questions.
Why is awareness of consumer psychology important?
The awareness of consumer psychology patterns is crucial while analyzing price sensitivity. The visual below sheds light on some crucial insights into shoppers’ behavior today.
What is price sensitivity?
Price sensitivity is a measurement that calculates how much the price of an item affects the consumer's purchasing behavior. Low price sensitivity can indicate that customers are highly motivated to buy the product no matter what it costs, while high price sensitivity can indicate that price increases might discourage customers from buying.
Why is price sensitivity important?
Analyzing price sensitivity can help companies and manufacturers accurately price their products and align with their customers.
What influences price sensitivity?
A combination of things can influence a product's price sensitivity, ranging from availability to income levels. Here are some of the most common factors and why it's important to consider each of them:
How does competition affect the price of a product?
Competition is when companies in similar industries offer similar products or services to the same customer base. This can often affect the demand and price of products. For example, if every local store sells a comparable hair product, the one with the lower price might sell more to customers who have a high price sensitivity. This can change over time as different companies adjust their strategies and may enter and exit certain markets depending on sales. If there is less competition, you may see lower price sensitivity, and your company may consider slightly raising the price of a product.
Why are exclusive shoes so expensive?
Exclusive products can create higher prices, but sometimes the customer sensitivity may remain low. Customers may be more likely to pay higher prices based on the limited availability of certain products. For example, a sneaker company may manufacture only 100 pairs of shoes in a particular style. They may charge more than their normal shoe prices because of this exclusivity, but still make sales to customers with low price sensitivity.
How to calculate price sensitivity?
To calculate price sensitivity from demand, a company might look at the change in demand compared to the change in price. If the price increases at a higher rate than the demand, customers might consider other brands, indicating high price sensitivity. Customer surveys might also provide you with information about how much demand actually exists for a product.
Why is variable pricing important?
A customer's location and income can make them more sensitive to price. This means if certain products are suddenly more expensive, customers may purchase the cheaper brand if their incomes are lower. Companies might consider variable pricing to provide appropriate pricing to customers in different locations. Selling high-quality, expensive products in locations where income levels are high might be effective consistently, since individuals might not be as sensitive to prices and price 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.
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.
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.
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.
Connected Business Concepts
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production.
Why are people less price sensitive?
If a consumer is not able to carry inventory, for example say products like milk, fresh vegetables that you can't store them for a long time, people are less price sensitive because when the product is on sale, you can't buy it for the next months of consumption.
Who is more price sensitive to steel?
Even though we have the same metal steel, the person who's more price sensitive to the steel is the person who makes a steel furniture as opposed to the person who makes wooden furniture. Now this one's not very surprising. If somebody else is sharing a part of the bill, you are going to be less price sensitive.
What are the core topics of customer loyalty?
Taught by three of Wharton's top faculty in the marketing department, consistently ranked as the #1 marketing department in the world, this course covers three core topics in customer loyalty: branding, customer centricity, and practical, go-to-market strategies . You’ll learn key principles in - Branding: brand equity is one of the key elements of keeping customers in a dynamic world in which new startups are emerging constantly. - Customer centricity: not synonymous with customer service, customer centricity starts with customer focus and need-gathering. - Go-to-market strategies: understand the drivers that influence customers and see how these are implemented prior to making an investment. Complete this course as part of Wharton's Business Foundations Specialization, and you'll have the opportunity to take the Capstone Project and prepare a strategic analysis and proposed solution to a real business challenge from Wharton-governed companies like Shazam and SnapDeal or to a challenge faced by your own company or organization. Wharton-trained staff will evaluate the top submissions, and leadership teams at Shazam and SnapDeal will review the highest scoring projects prepared for their companies.
What is go to market strategy?
In this module, you will examine the critical marketing topic, “Go to Market Strategies.” Professor Jagmohan Raju has designed these lectures to help you gain a deep understanding of the role of communications in marketing strategy, fundamentals of pricing, and how to manage channel conflicts. You will explore the 7 Ms of developing a communication plan, learn how to measure price elasticity, and understand disruption in information delivery. By the end of this module, you’ll be able to use effective analytical tools to form a communications campaign and create appropriate access points to your brand for your customer.
Is a product more price sensitive?
They are more price sensitive. So if you spend more on a product or service here usually more price sensitive. What is also interesting is the same product. If it's a bigger part of your cost structure, you'll be more price sensitive. But if it's a very small part of your cost structure, you'll be less price sensitive.
Do wine drinkers show price quality?
Knowledgeable wine drinkers will not show as much price quality effects as novices. By the way we have seen many studies which are brain scans, where for novice drinkers you see this effect very strongly. Another area that affects consumers price sensitivity is their ability to carry inventory.
Understanding Price Sensitivity
- Price sensitivity can basically be defined as the extent to which demand changes when the price of a product or service changes. The price sensitivity of a productvaries with the relative level of importance consumers place on price compared to other purchasing criteria. Some people may …
Influences on Price Sensitivity
- Price sensitivity places a premium on understanding the competition, the buying process, and the uniqueness of products or services in the marketplace. For example, consumers have lower price sensitivity if a product or service is unique or has few substitutes. Consumers are less sensitive to price when the total cost is low compared to their total income. Likewise, the total expenditure c…
Business Pricing Strategies
- There are a number of different factors that businesses use to come up with pricing strategies. These factors will separate consumers based on their sensitivity to prices. Businesses may use marketing and advertising techniques to get consumers to shift their focus from price to other factors, such as product offerings, benefits, and other values. This is common in the travel, touri…
The Bottom Line
- Price sensitivity affects how much money companies and employers generate from their activities and consumer spending. That makes it a crucial component of the economyand something very much worth keeping tabs on.
Explanation
How to Calculate Price Sensitivity?
- The formula for calculating Price Elasticity is generally used to calculate Price Sensitivity and is mentioned as follows: Price Sensitivity Formula = % Change in Quantity / % Change in Price Here, 1. Change in Quantitydenotes the alteration in purchased quantity by the buyer. 2. Change in Pricemeans the increase/decrease in the price of the same p...
Examples
- Example #1
Calculate the price sensitivity of a service whose demand has fallen by 10% by an increase of 25%. Solution: Price Sensitivity = % Change in Quantity / % Change in Price 1. = – 10% / 25% 1. PS = – 40% - Example #2
Calculate the price sensitivity of the product of the company. Let’s assume that an FMCG companyFMCG CompanyFast-moving consumer goods (FMCG) are non-durable consumer goods that sell like hotcakes as they usually come with a low price and high usability. Their exa…
Why Is It Important?
- It is an essential measure in deriving the product or services prices and understanding consumer behavior in the market. It is a crucial tool to judge the value required by the customer and the pricing of the product by the company. So it doesn’t hurt either party. The price is known as Equilibrium price. Thus, the company assesses or performs modifications in the product’s price t…
Factors Affecting Price Sensitivity
- Various factors could affect the customers’ decision-making when the price of a product is concerned. The price sensitivity varies from consumer to consumer and the value perceived from the purchase.Some products are highly elastic, and some are low; thus, it depends a lot on the product offered and the buyer’s perception. A few of the important ones are mentioned below: 1. …
Conclusion
- Wrapping up, this concept is quite popular and useful in the business world because it delineates demand and price relationship to understand the consumer behavior, sensitivity, and value creation, and helps companies to launch or amend product prices or to create a valuable product or service to fit perfectly in the demand and price matrix.
Recommended Articles
- This has been a guide to What is Price Sensitivity & its Definition. Here we discuss how to calculate the price sensitivity examples using formulas and factors and why it’s important. You can learn more about from the following articles – 1. Unitary Elastic Demand Definition 2. Price Elasticity of Supply 3. Demand Curve Examples 4. Calculate Cross Price Elasticity of Demand