These factors may affect your customers’ price sensitivity

What is price sensitivity?

Price sensitivity shows how much the consumers’ willingness to buy changes as the price of a product or service changes. It’s actually a customer reaction to a given price. In economic terms, price elasticity of demand is where we examine how the quantity purchased (demand) of a product develops as a function of price change.

In general, the demand for items that meet basic needs (e.g. flour, fuel) is inelastic because we typically need them in a given quantity for everyday life, so an even larger price increase would only reduce consumption to a lesser extent. In contrast, the demand for luxury products or services (e.g. LED TVs, spa holidays) is flexible, e.g. a significant price drop would significantly increase sales.

Of course, the whole picture is much more nuanced than this, and price sensitivity is not only determined by the market in which we operate.

Which factors could affect price sensitivity?

It is recommended that all companies study price sensitivity and the factors influencing it in their own market and among their target group, as the knowledge gained in this way can be used to develop a much more accurate - and revenue-generating - pricing strategy.

Quality and unique value

Customers are less price sensitive if we offer them a top-quality product that promises high prestige or some outstanding value that is important to them - e.g. Rolex watch.

Usefulness

If using our product provides an advantage or benefit to the customer that helps create the desired result, they will care less about how much it costs. This may include an excellent, indestructible, professional work tool, e.g. a high-performance drilling machine.

Income

Higher salaries mean more purchasing power, lower price sensitivity, and vice versa. But not always! It is important to be aware that if we are dealing with products of medium or lower quality as well as lower prestige, increased incomes will most likely induce the purchase of more branded, better-quality products.

Substitute products and comparability

If competitors can offer a product with almost the same consumer value with a similar level of service and accessibility (e.g. sports shoes, refrigerators), the buyer will not see a reason to pay more for “nothing”. In many markets, therefore, competition is extremely fierce, where the big ones are constantly bombarding consumers with good substitute product offers by pushing down prices.

(This raises the importance of the specific value mentioned earlier, ie 'irreplaceability', which may be related to the product or the quality of service, or both.)

Urgency

If someone needs something right away, they usually don’t care about the price, e.g. medicines. It is available with certain sales techniques (e.g., the use of an inventory countdown) to make the customer feel the need to buy the product on offer, otherwise, they will miss it (in this case, we are not talking about a price auction).

Up or down?

It is also important to mention that price sensitivity can take different degrees by raising or lowering the price. Imagine that our product is organic tomatoes. In this case, the basic consumer motivation is a healthier meal. There are some who will easily pay a higher price compared to chemical tomatoes. Ask the following questions:

• How much will demand increase if we bring the price down 20% and thus get closer to non-organic prices?
• How much will demand fall if we raise the price by 20%?

With this premium product, it is likely that demand will remain despite the 20% increase if we already have an established customer base (trust, quality guarantee), so price sensitivity will not change or will change only a bit. If we look at the 20% price reduction, it is likely that some buyers will react to this, i.e. they will purchase, so price sensitivity will decrease (even significantly) in this case.

This consumer decision can be greatly influenced by whether we can be cheaper compared to alternative bio-tomatoes and how much more expensive we remain compared to chemical tomatoes. It is conceivable that by reducing the price, we can achieve an increase in turnover to such an extent that, in the end, the profit will also increase significantly.

Of course, this is a very simple example. It is worthwhile for each company to find out among the relevant target groups to what extent its products or services generate sales growth or decrease at different price levels, as well as to constantly monitor market changes and examine the factors influencing price sensitivity.