What Is Price Sensitivity and Why Is It Important?

By Indeed Editorial Team

Published 23 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Many companies of all sizes strive to increase their revenues through marketing and other business strategies. One of the strategies that a company can use to increase its sales and revenues is a pricing strategy, which typically involves a change in the price of the company's goods and services. Understanding the concept of price sensitivity can be beneficial in helping you make a well-informed decision about how to price a company's products more attractively. In this article, we examine what it is, why it's an important concept for companies and how to measure it accurately.

What is price sensitivity?

Price sensitivity refers to how consumer behaviour can be influenced by prices and changes in pricing. It's a measurement of how willing a consumer is to purchase a product or service at each possible price that a company can set. It can also refer to a measurement of how changes in prices can affect a consumer's willingness to purchase a product or service.

If the consumers of a product are very price sensitive, it means that they might be significantly less likely to purchase a product if the price increases. Similarly, they might be significantly more likely to purchase a product if the price decreases. There are many factors that can influence how sensitive consumers are to changes in the price of a product, such as their perceptions of the product and whether the product is a necessity. Generally, the sensitivity of consumers to price varies with each product.

Related: What Is Price Discrimination? (Plus How to Implement It)

Why is price sensitivity important?

When a company determines the prices that it wants to set for its goods and services, it's important for them to consider how likely consumers are to purchase a product at each price. This can enable them to set the most optimal prices to earn the most profit. This is especially important when a company is launching a new product or service and wants to set a price that enables them to earn a good profit while still enticing customers to purchase its product or service.

When making changes to the prices of a product or service, it's also important for a company to consider how this change might influence the sales of the product. If consumers are very sensitive to pricing changes for a particular product, increasing the price for the product may cause a disproportionate decrease in the number of purchases and vice versa. A company can use this information to alter its prices in a way that enables it to best achieve its business goals.

Related: Market Structures: Definition and 4 Types (With Examples)

How to measure consumers' sensitivity to pricing

Here are some steps that you can follow to measure how sensitive consumers are to the pricing of a product or service:

1. Conduct a pricing survey

A straightforward way to measure how sensitive consumers are to pricing and pricing changes is by conducting a pricing survey. This survey can enable you to determine how likely consumers are to purchase a product at a given price and how their willingness to purchase a product might change if its pricing changes. The method that you use to conduct a pricing survey may vary depending on the type of product that you want to gather pricing information on.

For a new product or service that you haven't launched, you can provide potential consumers with a range of prices. You can ask consumers to indicate whether they're willing to purchase the product at each price. Once you gather data from a sufficiently large sample size, you can determine the maximum price that consumers are generally willing to pay for the product. Similarly for existing products, you can provide existing consumers with a range of price increments. You can then gather data on how their willingness to continue purchasing the product might change with each price increase.

Related: What Is Predatory Pricing? (Plus a List of Price Strategies)

2. Conduct market research interviews

Additionally, you can also conduct market research interviews with existing and potential consumers of a product or service to find out more about their opinion on the pricing of the product. Compared to a pricing survey where consumers only indicate whether they're willing to purchase a product at a given price, a market research interview enables you to discover the thought process behind their decision. Through such a survey, you can find out what a consumer's opinion of a product might be at a given price.

For example, consumers might feel that if a product is too cheap, it may not be of good quality. At the same time, if a product is too expensive, they might feel like they're not getting value for their money. An interview can enable you to find out the price at which consumers feel that they're getting a good quality product at a reasonable price.

Related: Examples of Price Skimming (Definition, Pros and Cons)

3. Make price changes and measure their impact

Apart from gathering data from pricing surveys and market research interviews, you can also measure the real-world performance of a product or service at each price by making pricing changes and evaluating their impact. For new products and services, you can conduct market testing by offering them at different prices to different groups of consumers. You can then find out the price at which consumers purchased more of the product or service. This can help you determine the optimal price to set for the product.

For existing products and services, you can also make changes to the price and measure the impact of these changes on the sales of the product. For example, if you decrease the price of a product by 20% and find that there's a 100% increase in sales, it might mean that consumers are very sensitive to changes in price. You can thus use this information to calculate the price range at which you can earn the most profit after taking pricing and sales into consideration.

Related: Producer Surplus: What It Is and How to Calculate It

Factors that can affect price sensitivity

Understanding the factors that affect how sensitive consumers are to prices and pricing changes can also help you make better pricing decisions. Here are some of the factors that can affect how sensitive consumers might be to the price of a product:

Availability of alternatives

One of the main factors that can affect how sensitive consumers are to prices is the availability of alternatives. If there are many readily available alternatives to a product, consumers are typically more sensitive to the price of the product. This is because they can easily compare the prices between the different options and choose the option that provides them with the most value for their money. Increases in price are also likely to cause consumers to switch to alternatives, whereas decreases in price may increase the number of consumers for the product.

Related: Product vs. Service: Differences and Characteristics

Product differentiation

The degree to which a product differs from its alternatives may also be a factor that can influence how much consumers might pay for it. If consumers perceive a product as unique, this means that they're typically more willing to pay a higher price for it. They may also be willing to continue purchasing it even after a price increase because they might feel that they're unable to replace it with another product.

Related: What Is a Differentiated Strategy? (With Benefits)

Type of product

The type of product can also affect how sensitive consumers are to its price. For products such as food and household essentials, consumers may not be as sensitive to their prices because they're likely to purchase these products regardless of price out of necessity. In contrast, consumers tend to be more sensitive to the prices of luxury products such as watches and cars because they don't require these products to survive and may thus only purchase them if they feel that they're getting good value for their money.

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