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What is Price Sensitivity and How to Measure It?

By Priceva
on July 15, 2022
When you are trying to figure out the optimal prices for your products, it is important to understand how much your potential customers are ready to pay. This is where price sensitivity comes into the picture. This metric shows how buyers’ behavior changes in relation to cost fluctuations, so it should be an essential part of your pricing strategy.

This article covers the definition of price sensitivity, the ways to calculate and estimate it, factors impacting price sensitivity, and pro tips for setting well-balanced quotes.

What Is Price Sensitivity?

Price sensitivity is the extent to which consumer purchasing behavior changes depending on price fluctuations. It allows retailers to figure out the percentage of sales that will be gained or lost at particular price points. Proper analysis of price sensitivity allows sellers to set prices that will both satisfy customers and allow them to reach the desired profit margin.


Products are considered to be price sensitive when even a minor change in cost significantly affects demand. This is typical of products that have many substitutes available. Products with a stable demand regardless of price changes are inelastic. Such goods are usually premium or ones without alternatives.

High price sensitivity means that customers are not likely to continue buying a product even after a minor price increase — they will start thinking it is unreasonably overpriced. Lower price sensitivity means that a higher price will not make a significant difference in demand because customers are ready (or have no choice but) to pay more.

Price sensitivity is also connected to the elasticity of demand, which is how much the demand changes in response to price corrections.

Why Is It Important?

When you are aware of the price sensitivity of your products, you will be able to understand how price corrections will impact your profits. Besides that, you will be able to calculate the right timing for repricing and be aware of the current buying power of customers.

Since price sensitivity is an ever-changing metric, it should be tracked continuously. Knowing the current price sensitivity allows you to choose the most optimal price point (or equilibrium price) where the supply and demand produce the biggest revenue possible.

Note that price sensitivity is not a strategy — it is a metric that helps to define an optimal price, and should be used in tandem with other statistics and approaches.

Factors That Affect Price Sensitivity

Price sensitivity depends on a multitude of factors, including the industry, seasonality of products, and other market conditions. Here are the aspects that matter the most:

  • Type of product. The majority of foods and household items that people use every day are more sensitive than other products. Of course, milk, bread and soap will always be in demand regardless of the economic situation. However, during financial crises, people try to purchase essentials at the lowest price possible, which triggers price sensitivity. When it comes to luxury items, their demand is hardly influenced by price changes.
  • Reference price. Before making a purchase, the majority of customers compare products and try to pick the one with the best quality and a reasonable cost. Every buyer is ready to pay a certain approximate sum for an item that he bears in mind — this is called the reference price. If the real product’s cost greatly differs from this number, buyers will not consider it, which may further increase price sensitivity.
  • Cost of switching. When it comes to services, clients often have to pay onboarding fees when they want to change a provider. The process of switching can be time-consuming and risky, which makes customers think twice before making a move. Many of them prefer sticking to a well-established, trusted brand instead of facing possible complications posed by trying a new company’s service.
  • Product uniqueness. When your product has no analogs on the market, customers can tolerate a price increase – there are no competitors to offer a better deal. Besides, if the item quality is good enough, consumers will be less likely to compare it to other possible substitutes.
  • Product differentiation. If your product is easy to compare with other similar items on the market, price sensitivity will be high. It is crucial to offer unbeatable advantages in terms of price, quality or uniqueness.
  • Brand’s fairness. With every particular brand, customers can view products as fairly priced or overpriced. If you increase the cost but do not justify it by better quality, service or outstanding features, your sales volume can drop. Buyers who are satisfied with the quality of a product are likely to purchase it again, sometimes even at a bigger price. When a brand builds trusting relationships with consumers, the most loyal ones become less price-sensitive.

How to Measure Price Sensitivity

In order to estimate price sensitivity, you need to understand your target market and buyer personas. Each customer has a different perception of your product’s value, so they will be ready to pay different sums. Hence, you need to measure the price sensitivity of each target market segment instead of calculating an average price for your entire customer base. That will allow you to make more accurate predictions about the effect of a price change on sales volume and find the most optimal price point.

There are several ways to evaluate price sensitivity — they may be used in combination for you to receive the most reliable reference rates.

Price Sensitivity Calculation Formula

Price sensitivity can be calculated using a simple formula: you need to divide the percentage of change in demand (quantity of products) by the percentage of change in price.

PRICE SENSITIVITY = % Change in Quantity / % Change in Price


Where:
Change in Quantity denotes the difference between the quantity of items purchased by customers.
Change in Price denotes the alteration in price of the same item compared to its previous cost.

Let us observe an example where the price of a bar of soap rises by 50% and purchases fall by 20%. Using the above-mentioned formula, we can easily calculate the price sensitivity of soap bars:

Price sensitivity = -20% / 50% = -0.4.

We can see that for every percentage of soap price increase, purchases are affected by almost half of the percentage. This approach can be used to research each product and see how price changes can reduce or increase demand. However, it is applicable to existing, mature items.

Price Laddering

Price laddering implies asking potential buyers if they are ready to purchase a certain product at a certain price, which is usually ranked on a scale from 1 to 10. If the respondent’s answer is somewhere below a pre-set minimal threshold (for example, 7 or 8), the price is too high and should be reduced. After that, the cost is being lowered to define the price point at which customers are ready to purchase the product.

Although this sort of research can be conducted repeatedly, the majority of customers are asked about a maximum of three price points to avoid bias in their responses. The data collected in the research is used to calculate the percentage of the market that would buy a product at a certain price.

The best thing about a price ladder is that respondents are not asked to make any particular price suggestions. Instead, they match their intent with a scale, which makes their answers straightforward. At the same time, the results might be far from reality because some respondents refuse to buy at any price points you suggest, and some treat the survey as a negotiation, which affects the accuracy of research. Besides that, price laddering requires a large client database which complicates research for small businesses that lack an audience.

Van Westendorp Price Sensitivity Meter

The Van Westendorp questionnaire is a bit different from the previous approach because respondents define price points themselves. This type of research helps to check customers’ intention to pay within certain pricing ranges. Participants are asked four questions:
  1. What price range do you deem as ‘too expensive’ and would not consider buying a product?
  2. What price range do you deem as ‘too low’ and would suggest that the product quality might be poor?
  3. At what price would you think that the product starts to be costly, so you would hesitate about buying it?
  4. At what price would you consider the product to be a great deal and be ready to buy it right away?

The first two questions show the acceptable price band, and the last two narrow down the optimal cost range. After collecting enough statistics, you can analyze responses and calculate an optimal price point. The Van Westendorp meter provides a clear understanding of products’ price sensitivity and accelerates data collection.

The questionnaire allows you to determine too-cheap price points which make customers start doubting the quality of the product. That makes the results more detailed and insightful than with price laddering. Finally, the Van Westendorp questionnaire does not require involving a large number of respondents, as opposed to price laddering.

Direct Probing

This method implies asking potential consumers about the highest and the lowest prices they are ready to pay for a certain product or service. Hence, it allows you to define the upper and lower price limits.

This is a simple but straightforward way to measure buyers’ price sensitivity. However, the approach has one serious disadvantage: it fails to provide information about the average acceptable price point.

Sequential Preferences

With sequential preferences, potential customers are shown the list of several brands offering one and the same product at the same price. Respondents are asked to pick a preferable brand. After that, the price of one brand is altered to find out how consumers’ behavior changes in response.

This method provides incomplete information about price sensitivity because it does not reveal customers’ intensity for preferring a certain brand. To get a fuller insight, a company may introduce a four-point scale for each option: it may show strongly preferred, preferred, slightly, and the least preferred brand.

Tips for Reducing Price Sensitivity

When it comes to managing price sensitivity, the first thing that may spring to the entrepreneur’s mind is lowering the price. However, this is not the most efficient way: it is better to raise the product’s value in the eyes of price-sensitive consumers. Here is how you can implement it:

  • Quality marketing. Show how your product is better in order to justify the price. Customers will always pay attention to the cost of items, but when they know a product is worth the money, they are more likely to pay.
  • Attention to branding. When a brand gets more established and well-known, customers' price sensitivity usually falls. If you manage to position your brand correctly and win customer loyalty, would people want to choose alternatives? No, because they (or their friends) have already tried your product and are satisfied with it. By creating a strong and recognizable brand, you make the decision-making process simpler for consumers.
  • Exemplary service. Try to personalize your communication with clients. Come up with special offers and promotions, make sure to provide timely answers to their questions, and try to keep in touch with your audience.

Finally, consider price skimming if you are introducing a new product. That will allow you to recoup development and marketing expenses by targeting buyers who don’t mind paying more and then expand your reach to more price-sensitive consumers by lowering the price.

Pricing Is a Process

No matter which methods you use for measuring price sensitivity, you should remember that each customer has different expectations and purchasing power. Besides that, the value of your products may vary significantly from one individual to another. Pricing research allows you to shed light on how people see your brand’s and goods’ value, but these metrics are not stable.

In order to come up with an optimal price point, knowing price sensitivity only is not enough. You should also track competitors’ prices and the ever-changing market elasticity of demand. Manual analysis is too time-consuming, so consider automating the process with price intelligence software by Priceva. It enables online price tracking for brands and retailers, allows you to keep tabs on global and local competitors, and get an in-depth pricing overview on a comprehensive and easy-to-read dashboard.

To maximize the efficiency of your pricing technique, you can use a price optimization tool: it will monitor the market and provide you with optimal price recommendations based on elasticity of demand and relevant data. Besides that, it allows you to test different price scenarios without risking your business’s profit margin.

Conclusion

Price sensitivity is a widespread concept that helps companies get an insight into how customers perceive a product’s value and, accordingly, its cost. Implemented in a pricing strategy, it allows you to figure out an optimal price point that fits perfectly in the demand and price matrix.

FAQ

What is a high price sensitivity?

A high price sensitivity is observed when even a minor change in price has a great impact on customers’ willingness to buy the product. On the other hand, low price sensitivity means that consumers are ready to pay even in case of significant price alterations.

What are price-sensitive customers?

These are consumers who emphasize the cost of a product and become more or less likely to make a purchase in case of price changes. For example, when a product’s price rises by 5-10%, the demand for it among price-sensitive buyers lowers correspondingly. The more product options available on the market, the more price-sensitive consumers become.

What increases price sensitivity?

Price sensitivity is greatly impacted by the accessibility of product substitutes. If customers can easily find equally or closely priced alternatives, they are likely to switch to another brand after a price increase. Also, customers become more price-sensitive during periods of economic crisis, when their purchasing power decreases.

What products have high price sensitivity?

Some goods have a higher price sensitivity by nature, for example, foods and household items. People need them for living, and the demand for such products holds steady regardless of economic situation. However, during hard financial times, people try to get the best deals possible on these essentials.

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