Price sensitivity is a measure that shows how the prices for products or services influence consumers' purchasing behaviors. Simply put, it indicates how the product demand changes with an increase or decrease in the product’s price. It helps companies find out how the alterations in products’ cost will affect the sales volume and uncover the possible revenue by maximizing the price band.
Why is price sensitivity important?
As a business owner, you have to manage such things as choosing the industry for your brand, finding the best suppliers, selecting the products, and deciding what prices your customers will pay. Yet the most difficult thing is to find the balance in the price range so that customers could afford to purchase from you and at the same time you could obtain the expected profit. To effectively set the prices that suit you and your customers, you should be aware of price sensitivity.
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 the products or services are too expensive for them albeit the price might seem fair for 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 the opportunity to optimize your offerings to retain customers and attract more prospects.
Now that you know some reasons why it’s important to understand price sensitivity, let’s walk you through the factors that influence this measure.
Factors affecting price sensitivity
- Product type
- Reference price
- Switching costs
- Product uniqueness
- Ease of comparison
- Brand’s fairness
This measure is defined by the industry you’re in and, and the products you offer. There are several ways to change this degree. Yet, first of all, you need to find out the factors that affect price sensitivity to use this knowledge to your advantage.
- Product type. Some goods, especially products that people need for their everyday life like milk, bread, meat, fruits, toothpaste are more sensitive than other products. So you can be sure that these will be always in demand despite any economic situation. Nevertheless, in difficult times people try to purchase these essentials at the best price that results in increased sensitivity. On the contrary, some goods are less vital and the demand is influenced by quality, style, or brand (for example, expensive cars, luxury clothing).
- Reference price. As you know, customers compare products, evaluate all the alternatives to choose the best product that has 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 the clients have in their minds, customers most likely won’t consider these products. As a result, 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 the 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 alternatives. For example, it’s difficult to substitute a pair of Adidas sneakers with a generic one. However, it’s easy to substitute a loaf of bread from supermarket A with bread from supermarket B.
- Ease of comparison. If your product is easy to compare with other products since it doesn’t have any special benefits, the price sensitivity will be high. Remember, it’s critical to differentiate your goods and make customers choose your brand over alternatives. By doing this, you can establish a strong brand that is difficult to compare, so consumers will select you because of the quality, price, or features of your products.
- Brand’s fairness. Studies show that the fairness of your brand affects price sensitivity. Consumers often see the unfairness which usually arises from price discrimination practices. For sure, higher prices are important for profit maximization, however, it influences customers, as a result, your sales can drop. Present good products that have fair prices.
These are just a few factors for you to consider. The next step is to find out how to calculate this measure for your business.
How to calculate price sensitivity
If you want to find out the change in demand for your product if the price for it increases or decreases, you should calculate price sensitivity. With this formula, you can easily estimate the difference in demand as a result of a change in a product price.
Below you can find a formula to calculate price sensitivity.
Change in Quantity is a change in the quantity of product bought by a customer.
Change in Price is the 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.
How to reduce price sensitivity
- Create a strong brand
- Show the quality and value of your products
- Let customers explore the benefits of your goods
If you think that by reducing the price for your goods you can easily reduce price sensitivity, you aren’t quite right. Yet you are right if you think that there are several things that can help improve the situation and we’ll show you how.
- Create a strong brand. In today’s highly competitive environment, customers can find tons of alternatives to the goods they are looking for. That’s why it’s essential to build a strong brand. Since a great number of options make decision-making more difficult, consumers often seek to find one brand they love and trust and become its loyal customers. This can happen due to various reasons: cheaper price, better quality, some personal or professional reasons, or benefits. So your main task is to develop a brand people would admire.
- Show the quality and value of your products. Nowadays, many customers still pay attention to the price and try to find and buy products that have lower prices. The quality of the chosen goods often doesn’t justify the cost. It usually happens due to insufficient customers’ awareness about the quality of products. Provide your consumers with this information, explain to them why your goods are better.
- 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 the features your products or services have. Customers don’t care about some special features if they don’t carry any benefit or value. Show your consumers the real solution or benefit your product or service can bring.
To conclude, if you want customers to choose your goods, you should remember about the uniqueness of the products, reference price, quality, and benefits they can bring. This will enable you to reduce price sensitivity and let your business function properly.
- The article “4 Factors that Influence Price Sensitivity of Customers” defines the term and covers several factors that affect price sensitivity.
- The article “Pricing Sensitivity: Meaning, Calculation & Strategy” defines the term, explains its importance, and covers the factors that influence this measure.
- The article “Reduce Price Sensitivity And Make It Easy For Your Customers To Buy” explains how to measure price sensitivity and what can help companies reduce this measure.
Last Updated: 11.03.2021