Price sensitivity: what it is and how it’s calculated

Price sensitivity: what it is and how it’s calculated

03/25/2021 - Pricing strategy

Price sensitivity is the effect that the price has on your potential customers’ purchase decision. Knowing the relationship between your audience and their price perception is key to defining and testing your pricing strategy to ensure that it’s 100% in line with your business’s needs and objectives. Do you know how to calculate your customers’ price sensitivity? We’ll tell you how!

3 factors involved in price sensitivity

The perception that consumers have of price is affected by both the context in which they’re making the decision as well as the motivation behind their need to purchase. To be able to work with these, it’s essential to identify and incorporate them into your customer journey and the optimisation of your pricing strategy based on the moment in which they find themselves.

Let’s take a look at what these three price sensitivity factors are:

  • The type of need. Essential products have a much lower price sensitivity as their high and low prices are set in place. It’s difficult for the consumer to consider whether or not to purchase these items. However, the more superfluous the need, the greater the increase in this sensibility. This is why luxury or branded goods are valued precisely based on their high cost, which is why an excessive discount could be perceived as negative due to the loss of exclusivity.
  • Substitute products. Are there other products that allow consumers to achieve the same benefits at a lower price? This is one of the keys to determining the price sensitivity in certain catalogues. In fashion, for example, it’s very common to see highly variable prices for different qualities or brands that are considered equivalents. In the food and pharmaceutical sectors, this is a very common phenomenon with private labels.
  • The amount of demand. There is a close relationship between supply, demand, and price. This significantly affects the consumers’ perception of price. Trends in certain sectors have a direct influence on impulse buying, setting aside the monetary value of the product and allowing brands to take advantage of the situation to use a strategy of inflated prices.
Price sensitivity

How to calculate the price sensitivity for your products

Price sensitivity is calculated using the relationship between the percentage of sales volume and the percentage of fluctuation in prices, when these vary.

Price sensitivity = % change in sales / % change in price

So, if by increasing the price of a product by 15%, your sales fall by 30%:

Price sensitivity = −15% / 30% = −0.5%

This is the most realistic calculation you can use to know the real variance in consumers when faced with specific price change percentages. Nevertheless, you can use previous studies to determine what the perfect pricing strategy is

Taking price sensitivity into account is key to achieving a pricing strategy that’s appropriate for each moment and each type of consumer that you’re targeting. If you also consider the changes that occur in the pricing strategies of your competition, you’ll be able to predict their decisions to take advantage of every single opportunity. Do you have any questions about how you can improve your pricing strategy? Contact us.

Category: Pricing strategy

Tags: ecommerce, elasticity, pricing

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Angela de la Vieja
Content Manager

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