Price Sensitivity

Price sensitivity is a measure that shows how different prices for products or services influence consumers’ purchasing behaviors. Simply put, it indicates how product demand changes with an increase or decrease in a product price. It helps companies determine how product alterations will affect their sales volume and uncover possible revenue by maximizing their price band.

Why is price sensitivity important?

As a business owner, you have to manage such things as choosing an industry for your brand, finding the best suppliers, selecting products, and deciding on your prices. Yet the most challenging thing is to find the balance in the price range so that your customers can afford to purchase from you, and at the same time, you could obtain the expected profit. You should be aware of price sensitivity to set the prices that suit you and your customers effectively.

If you already have great products or services, but they aren’t selling, it might be the problem of high price sensitivity. Customers simply can’t purchase from your brand because it is too expensive for them, albeit the price might seem fair to you.

High price sensitivity indicates that customers can easily reject buying a product since its cost is unreasonable. When you deal with such consumers, be attentive to their needs and try to add some value to your product to meet their wants and reduce price sensitivity. Low price sensitivity shows that clients are willing to pay the mentioned price and can even pay more for it.

The measure helps derive the price of products and services and understand customer behavior. It empowers your company to assess how fluctuations in prices affect the demand for your products. Eventually, by keeping this measure in mind, you have an opportunity to optimize your offerings to retain customers and attract more prospects.

Now that you know the reasons why it’s important to understand price sensitivity, let’s walk you through the factors that influence this measure.

This measure is defined by the industry you’re in and the products you offer. There are several ways to change this degree. Yet, first of all, you need to find out what factors affect price sensitivity.

• Product type. Some goods, especially products that people need for their everyday life like milk, bread, meat, fruits, or toothpaste, are more sensitive than other products. You can be sure that these will always be in demand despite any economic situation. Nevertheless, during difficult times, people try to purchase these essentials at the best price, resulting in increased sensitivity. On the contrary, some goods are less vital, and their demand is influenced by quality, style, or brand (for example, expensive cars or luxury clothing).
• Reference price. As you know, customers usually compare products and evaluate all the alternatives to choose the best product with high quality and a reasonable price. When purchasing goods, buyers always pay attention to the sum of money they are willing to pay for the quality of these products and the benefits they can bring. If the cost of your goods differs greatly from the approximate price your clients have in mind, they won’t consider these products. As a result, their price sensitivity will be high.
• Switching costs. In most cases, to change a provider, the client has to pay an onboarding fee again. However, it’s not the main problem. Frequently, people think about the risks associated with this switching. For example, if a customer considers the possibility of changing a trusted brand that has served faithfully for years on a company that has recently appeared on the market. After all, a customer is more likely to stick to an established brand to avoid possible complications the new brand might bring.
• Product uniqueness. If you’re lucky enough to get a unique product that your competitors don’t have, you can increase the price for this product, and customers will tolerate it. For example, healthcare provision or medicine that only your company has. Moreover, when the association of these products with your brand is very strong, people won’t compare your goods with the alternatives. For example, it’s difficult to substitute a pair of Adidas sneakers with a generic one. However, replacing a loaf of bread from supermarket A with bread from supermarket B is easy.
• Ease of comparison. If your product is easy to compare with other products since it doesn’t have any special benefits, price sensitivity will be high. Remember, it’s critical to differentiate your goods and make customers choose your brand over your competitors’. By doing this, you can establish a strong brand that is difficult to compare, and consumers will select you because of the quality, price, or unique product features.
• Brand’s fairness. Studies show that the fairness of your brand affects price sensitivity. Consumers often see the unfairness that usually arises from price discrimination practices. For sure, higher prices are essential for profit maximization, yet they can negatively affect your customers, and, as a result, your sales can drop. Consider presenting quality products that have fair prices instead.

These are just a few factors for you to consider. The next step is to learn how to calculate this measure for your business.

How to Calculate Price Sensitivity

If you want to evaluate the change in demand for your product when its price increases or decreases, you should calculate price sensitivity. With this formula, you can easily estimate the difference in demand due to the changes in your product price.

Below you can find a formula to calculate price sensitivity.

Where:

Change in Quantity is a change in the quantity of a product bought by a customer.

Change in Price is an increase or decrease in this product’s price compared to its previous cost.

Now it’s time to proceed to the tips that will help you reduce price sensitivity.

If you think that you can quickly reduce your clients’ price sensitivity by lowering the price of your goods, prepare to be disappointed. However, there are several things that can help improve the situation, and we’ll show you how.

1. Create a strong brand. In today’s highly competitive environment, customers can find tons of alternatives to the goods they need. That’s why it’s essential to build a strong brand. Since a significant number of options makes decision-making more complex, consumers often seek to find one brand they trust and become loyal customers. This can happen due to various reasons: lower price, better quality, some personal or professional reasons, or benefits. Your main task here is to develop a brand people would admire.
2. Show the quality and value of your products. Nowadays, many customers still pay attention to your price, trying to find and buy products that have lower prices. The quality of chosen goods often doesn’t justify the cost. It usually happens due to the lack of customers’ awareness about the quality of products. Provide your consumers with this information and explain to them why your goods are better.
3. Let customers explore the benefits of your products. There is no point in turning the market into a battlefield between you and your competitors to show your products’ or services’ features. Customers don’t care about some special features if they don’t carry any benefit or value. Show your consumers the actual solution or benefit your product or service can bring.

Remember about these three points when creating your brand and presenting products and services to your target audience. This will help you increase brand engagement and improve sales.

To conclude, if you want customers to choose your goods, you should remember to always bring out the uniqueness of your products, reference price, quality, and benefits they can bring. This will enable you to reduce price sensitivity and let your business function properly.

Resources:

1. This article defines the term and covers several factors that affect price sensitivity.
2. This article defines the term, explains its importance, and covers the factors that influence this measure.

Last Updated: 22.03.2023