Pricing sensitivity: definition (the right price point for the right customer)

In a saturated marketplace, how do you make your business stand out? Consumers are increasingly seeking personalized and tailored solutions to meet their needs. Enter consumer pricing sensitivity.

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What is pricing sensitivity?

Price sensitivity refers to the extent to which a change in the price of a product or service impacts a consumer’s purchasing behavior. In essence, it measures how the demand for your offering fluctuates in the face of a price increase or decrease. The price sensitivity of a product varies according to its perceived importance along with other contributing factors.

Price elasticity determines the change in product demand per the price shift. To achieve their desired profit margins, businesses must strategically leverage both price sensitivity and price elasticity.

What is a high price sensitivity?

When consumers are highly sensitive to a change in price, even a minor price adjustment can lead to a drop in demand. In the case of a price alteration, they are more likely to opt for an alternative that they consider fairly priced.

What is price insensitivity?

On the contrary, price insensitivity is defined as a lack of response in the face of a price change. There is little or no change in demand in this case.

What is equilibrium price?

In an ideal situation, the equilibrium price is the optimum price point. Supply and demand are effectively in equilibrium and the market is in a state of balance with gains in revenue.

How to measure pricing sensitivity

Price sensitivity can be measured by dividing the percentage of change in quantity by the percentage change in price.

However, if this equation seems deceptively easy, that’s because it is. Now, more factors than ever can affect consumer’s sensitivity levels. A simple calculation can no longer yield the results that businesses require. PricingHUB’s experimental approach allows for a more scientific and precise measurement of consumer price sensitivity. With machine learning, we can gather a constant stream of data, allowing us to apply the right price at the right time.

Van westendorp’s price sensitivity meter

The Van Westendorp price sensitivity meter is a series of four questions concerning price. It is a technique employed by market researchers to unearth the price sensitivity of consumers to determine the most attractive and relevant price point for them. The questions ask respondents at which point they would deem a product 1) too expensive; 2) expensive/high-end; 3) cheap/good value; and 4) too cheap.

By using this method, four key points can be mapped out on a graph:

Point of Marginal Expensiveness – where inexpensive and expensive intersect
Point of Marginal Cheapness – where too cheap and cheap intersect
Optimal Price Point – where too cheap and too expensive intersect.
Point of Indifference – where cheap and expensive intersect.

Garber granger pricing method

Garber Granger’s approach is simple yet effective. Based on asking consumers about their willingness to buy a product/service at a particular price point, this method allows market researchers to analyze the relationship between price sensitivity and elasticity of demand.

Harnessing historical data

Analyzing internal sales data will provide essential insights in how previous changes in prices have influenced demand.

Testing the waters: A/B testing

Dynamic pricing solutions such as PricingHUB allow businesses to conduct A/B testing. Experimenting, monitoring and contrasting divergent price points provides companies the opportunity to forecast the potential impact of a price alteration.

We’re here to help you surpass your business KPIs. Our innovative retail & e-commerce pricing tool employs the power of relentless machine learning and A/B testing to fine-tune your pricing strategy. We’ll show you how every price tweak can impact your bottom line by comparing crucial metrics like profit, revenue, sales volume, and margins against a control group.

Price sensitivity insights: how your business benefits

Due to the volatile and ever-changing nature of the marketplace, the tracking and continuous adjustment of pricing is essential. Observing consumer price sensitivity on an ongoing basis allows businesses to adjust their prices to best meet their customers’ needs. PricingHUB streamlines this process, by combining automation with historical and contextual data.

Customer retention

Recognizing how price changes affect your existing customers can help you strengthen their loyalty by avoiding unappealing and potentially deterring price points.

Perfecting pricing strategies

Learning how sensitive customers are to price alterations allows businesses to set optimal prices and apply dynamic pricing strategies.

Boost Revenue

Effective pricing strategies are not only appealing to customers. The optimal price achieves alignment and will aid in boosting profit margins.

Relationship between price sensitivity and elasticity of demand

The price elasticity of demand is a quantitative measure of price sensitivity. It is an economic metric measured by dividing the percentage change in quantity demanded / % change in price. If the value is less than one, the demand is inelastic, meaning relative price changes observe small changes in demand.

Elastic demand has a value greater than one. Customers are more reactive, with small changes in price leading to significant drops in demand.

Knowing and harnessing both elements is essential to discovering the optimum price point.

Factors that influence pricing sensitivity

There is a myriad of factors that can influence price sensitivity among consumers.

One of a kind? product uniqueness

If your product is a major player in an isolated or quite distinctive niche, consumers may be more tolerant of price changes. However, if their problem or need can be solved or filled by multiple players for a lower offer, they will be more sensitive to pricing.

Your offering – Type of product or service

Different classes of products and services will be more sensitive than others. Staples such as bread, milk, meat, toothpaste and petrol are such an example. These items have a steady rate of demand, regardless of external economic factors. During turbulent periods, however, consumers will become increasingly aware of change and will source essentials at the best price.

Value perception

Brand loyalty

Forging and cultivating a relationship with customers will demand more time and reap even more rewards. Offering high-quality care, products and just prices strengthens this connection. This bedrock means that customers will be more receptive to changes in price.

Disposable income

Disposable income plays a role in the level of price sensitivity experienced. The larger the monetary dent by the product, the higher the likelihood of high price sensitivity.

Reference price

Consumers will engage in comparison shopping. They will weigh up different vendors and keep a ballpark figure – the reference price – in mind. In an over-crowded marketplace, the final decision may be made based on price alone.

Seamless switching? think again

Practicality and pricing are also linked. The thought of switching to another provider of a service can raise concerns such as hidden costs, consistency, value and support. If a current provider is reputable and offers the path of least resistance, consumers are willing to withstand a price change.

Urgent needs require solutions

If there is an overwhelming sense of urgency driving a consumer’s purchasing choice, price will not play a substantial role in the decision-making process. An example of this is when an individual is in need of an emergency medical service.

Examples of price sensitivity in action

Price sensitivity oscillates; it varies from consumer to consumer and from products and services.

Travel

The travel industry – air travel in particular – is known for its elastic demand. The sheer amount of options, ease of comparison and differences across segments result in varying degrees of sensitivity.

Dynamic pricing has been implemented in the travel sector based on demand, date and time of departure and competitor’s pricing.

E-Commerce

Crowded markets and cut-throat competition in the e-commerce landscape mean pricing is king.

An example of employing customer sensitivity can be seen in our work with Allopneus, the leading French tyre distributor. One tyre is sold every 9 seconds on their e-commerce store, with competitors monitoring each move they make.

An ample catalogue of products is available to customers. Allopneus joined forces with PricingHUB to offer optimized prices across multiple product categories and brands, without cannibalizing their offerings.

Seasonality is another key determinant of price sensitivity. Jadeo, a leader in the European online sales of accessories, costumes and decoration, had only optimized 10% of their online products. This manual and tedious labor was inefficient in both boosting profits and meeting customers’ expectations. For recurring seasonal items, we utilized our machine learning technology to opitmize prices year-round, taking into account external forces.

Jadeo – Price optimization in a highly seasonal environment

Find out how Jadeo faces high seasonality and optimize its prices using consumers’price sensitivity.

Download the success story

Fashion & Clothes

While fashion and clothes are typically considered to be price-sensitive, there are a variety of factors that affect them. The vast array of options, the rise of fast fashion and seasonality can either exacerbate or lessen sensitivity scores.

Subscription services

Sensitivity of subscription services will vary based on the business offerings, perceived value, switching costs and USP. Media services such as Spotify and Netflix are sensitive to price, given the increase in competing platforms. However, the tempting variety and uniqueness of offerings are what could convince a consumer to remain loyal.

Sensitivity can fluctuate in the SaaS industry depending on how imperative the software is and if it is customer or business-centric.