What drives price sensitivity in your customers?

Price sensitivity is an important consideration in market positioning strategies. This topic involves basic economic concepts of supply and demand; when the price goes up, customers purchase less of your product. Let’s look at what determines how sensitive customers are to price changes.

A related concept is price elasticity of demand, or demand elasticity (DE). This is a measurement of how quickly demand changes as the price changes. This is measured with the amount of volume change relative to price change. DE is commonly measured based on a scale of 0 and 2. A value of 0 (price inelastic) suggests that there will be no change in demand, relative to price changes. A value of 1 is the optimization point, where the quantity change is proportionate to price change. A measurement of 2 (price elastic) suggests that customer response to price changes is volatile.

Factors that determine price sensitivity:
• The number of substitute products available (perceived by the customer)
• The higher % of the personal or corporate disposable or total income
• The more necessary the product is perceived to be
• Brand attachment
• The amount of time a product’s price increase is escalated, providing consumers with an opportunity to research alternatives

Examples:
– Products with a very low DE include salt, eggs or cigarettes. With salt, the product is very inexpensive in terms of personal income, and creates a lot of value relative to the price of usage. Eggs are a basic protein source, which typically remain fairly inelastic, but still has substitutes. Cigarettes are based on addiction, hence big tobacco has been able to increase prices over the last 40 years about 25x. A single cigarette now costs what a pack did.
– Products that are highly elastic usually have many substitutes, or represent a large percentage of total income. This includes products specifics brand of soup, chocolate bars or sports cars. When consumers can easily change brands or choose to defer the purchase, purchase behaviour follows.

It’s worth considering what factors drive sensitivity in your market, and whether you can impact them to decrease perceived substitutes, and whether your pricing is optimized in terms of maximizing sales volume relative to demand.

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