What Is Price Sensitivity? Things We’ve Learned From Marketing Research

Estimated reading time: 7 minutes

What is Price Sensitivity?

Price sensitivity refers to the extent to which individuals perceive and respond to changes or differences in prices for products or services (Monroe, 1973).

When it comes to consumer purchasing patterns, price sensitivity is a measure of the influence of different price points. 

Instead, the proportion of sales that will be lost or gained at a certain price point is measured in relation to another price point that is lower or higher than the current price point. 

Having a good understanding of your product’s price sensitivity can assist you in identifying the price range that will maximize your income while also determining the impact of pricing changes on your sales numbers.

Why is Price Sensitivity Important?

When it comes to consumer purchasing patterns, price sensitivity is a measure of the influence of different price points. 

Instead, the proportion of sales that will be lost or gained at a certain price point is measured in relation to another price point that is lower or higher than the current price point. 

Having a solid understanding of your product’s price sensitivity can assist you in identifying the price range that will maximize your business income while also determining the impact of pricing changes on your sales numbers.

Keep in mind, however, that contrary to what many people believe, your product’s price sensitivity is not synonymous with your pricing strategy in terms of pricing. 

Pricing strategies are similar to three-legged stools in that they require strong support from three different angles to be effective. 

When establishing your pricing strategy, make sure to provide equal attention to all three elements of the pricing strategy.

Price Sensitivity and Loyalty

`When customers are satisfied with the products or services, they buy the product again and again. These customers become loyal to the company as well as it’s brand. Loyal customers are very necessary for a company to build brand equity and to survive in the market by holding a good portion of the market share. Loyal customers are price insensitive to the price changes while non-loyal customers are sensitive in making the decision about a brand. (Kanghyun and Thanh, 2011).

What this shows is that a more accurate analysis of price sensitivity may be required at times as marking all of your audience as the same may distort any market research you conduct.

Loyal customers, as stated above, will be willing to shell out more money for a brand they trust due to familiarity with the quality of your product/service.

What is the best way to determine your price sensitivity?

When it comes to determining price sensitivity, having a thorough understanding of your target market and customer profiles is essential for success. In order for each cohort of buyers to be price-sensitive, each buyer persona’s perception of the worth of your product must be different from the others. 

The lowest price that one customer is willing to pay may be significantly greater than the lowest price that another customer is willing to pay. 

As a result, you must accurately evaluate the price sensitivity of each of your market segments separately in order to ensure that the data you acquire is indicative of the intricacies of your market rather than a non-representative average of all market segments across all market segments.

When you understand your client base’s level of price sensitivity, you can forecast the effect of a price increase on sales volume and eventually identify an appropriate pricing strategy for your company.

The next step after segmenting your target market is to select a methodology that goes beyond merely asking individuals “How much would you be willing to pay for product/service X?” as the starting point. 

People find it difficult to appropriately measure their own willingness to pay while they are thinking about it cognitively, which is why academics have developed strategies to get through this mental stumbling block. 

Price laddering and the Van Westendorp Price Sensitivity metre are two of the most often used approaches for determining price sensitivity in the financial markets.

The Price Laddering Method

Prices are laddered by asking potential buyers if they intend to purchase a specific product at a specific price, which is typically ranked on a scale of 1 to 10. 

If the respondent’s intent to purchase response falls below a predetermined threshold (this is usually between 7 and 8), then the price will be reduced, and the respondent is questioned again about their intention to purchase. 

Even while this process can theoretically be repeated indefinitely, most respondents are usually asked about a maximum of three price points in order to prevent introducing an excessive amount of response bias. 

The data accumulated is then evaluated in order to establish the percentage of the market that would purchase at a certain price point in time.

The brilliance of Price Laddering comes in the fact that survey respondents are not required to make any specific price suggestions in the poll. 

It is instead sufficient for them to match their intent with a sliding scale, which makes completing the survey straightforward.

Although price laddering is straightforward, it has the disadvantage of requiring respondents to answer questions about their purchase intentions at increasingly lower price points, which can be confusing. 

It is simple for them to treat the survey as if it were a negotiation, which will result in skewed findings. 

Because some respondents may decline to purchase at any of the price points you give, using price laddering means that not all respondents will contribute to your pricing research efforts. 

For the most part, these disadvantages mean that a successful and statistically significant price laddering campaign requires a big number of survey respondents, which presents a considerable barrier to many businesses that do not have the luxury of a huge client base.

Van Westendorp’s Price Sensitivity Meter

The Price Sensitivity Meter developed by Van Westendorp addresses the challenge of determining price sensitivity by polling people about their willingness to pay in a range of prices. 

Each respondent to the survey is asked four questions, which are as follows:

• At what point would you consider the product to be prohibitively expensive, to the point where you would contemplate not purchasing it? (It’s too expensive.)

• At what point would you consider a product to be priced so low that you would believe the quality couldn’t possibly be very high? (It’s too cheap.)

• At what point would you consider the product start becoming so expensive, that a purchase would still be possible, but would require substantial deliberation in order to decide whether or not to buy it? (High Expense Marker)

• At what price would you consider the product to be a good deal—a good value for the money you’re spending? (Affordable/Good Value)

The first two questions compel respondents to establish a price range that they consider acceptable, and the last two questions assist in narrowing the optimal price band that they have established. 

Using the responses to these questions, you can create a graph of the responses and use it to identify an optimal pricing band and a more particular optimal price point.

When it comes to establishing price sensitivity for relatively new items, Van Westendorp has a unique edge in terms of efficiency. In addition, each responder in a Van Westendorp survey will provide further insight into your product’s price sensitivity, allowing you to reduce the number of survey respondents required, hence speeding up your data gathering process. 

The price sensitivity metre is also the only approach that takes into account price points that are so low that customers begin to doubt the product’s quality, as opposed to other methods. 

As a result, the results acquired using Van Westendorp are far more comprehensive than the results produced through price laddering.

However, one disadvantage of Van Westendorp is that it might be difficult for businesses to manage and evaluate it at times. 

Keep in mind that pricing is a process.

Regardless of the methods used, a business ought to keep in mind that there is no one-size-fits-all solution when it comes to determining price sensitivity. 

Those who use your data are naturally based on their own personal views of worth, which may differ significantly from one individual to the next and from one cohort to the next. 

Pricing research, on the other hand, is a process of elimination. It all comes down to taking precautions against the unknown in order to shed more light on the genuine value of your goods.

By using the more technologically advanced tools, such as smart integration apps which can monitor both your competitors and the volume at which inventory is sold across various market actors – you could then cross-reference the same, or very similar items, at different prices and see where the sweet spot for pricing is.

Do keep in mind, as stated earlier, that brand loyalty should be accounted for when carrying out this analysis as a strong retained customer base can alter the results.