What is price sensitivity?
Price sensitivity is the degree to which changes in the price of a good or service affect a person’s decision to buy it. A price-sensitive customer can’t stand it when prices go up or down. People will either not buy something or choose something cheaper if the price is too high for them.
There is price awareness in every market and customer. No one or business on Earth would buy a product at any price. But buyers’ “acceptable price range” changes depending on things like
- How much do they want or need the thing?
- Their ability to buy things
- Market competition
- The prices of similar goods
- How much do they think the item is worth?
Outside factors, such as the economy and business trends, can also affect people’s sensitivity to price changes. During a recession, people tend to be more price-conscious. They look for cheaper options and put off buying things that aren’t necessary.
When it comes to price awareness, there are a lot of oddities that stand out. Some people are naturally “tight-fisted” and always choose the cheapest. Other people, on the other hand, put quality ahead of price.
You know your perfect customer (ICP) and what they think is essential. Then, change your pricing plan and how you move your products to make sales.
Synonyms
- Price elasticity
- Price responsiveness
- Price Tolerance
- Price-consciousness
Importance of Measuring Price Sensitivity
How sensitive buyers are to price directly affects their willingness and ability to buy your product or subscribe to it. It has everything to do with optimizing prices.
- If you charge too little compared to what your customers are usually ready to pay, you will lose money and get a lower return on your investment (ROI).
- If you charge too much for your answer, people will go with one of your competitors instead, and your churn rate will go up.
Knowing how and why people are sensitive to price also helps your marketing and sales teams tailor what they say and how they do it. They can help your product stand out in the market, show off its unique value, and solve customers’ problems in a way that makes them think the price is worth it.
You have a massive advantage over your competitors if you can address your customers’ worries and price your goods within the range of prices they are willing to pay. It makes you stand out from other sellers in the market and connects with your ideal customers emotionally.
Working within the limits of your customers’ price sensitivity encourages practical efficiency and is more essential than basic pricing methods like cost-plus pricing. If raising your prices will hurt your sales, the only way to make more money is to find ways to cut costs and increase your margins.
What Price Sensitivity Means for How People Make Decisions
You need to know how price sensitivity works to predict and change people’s buying choices. If you don’t know the exact amount your customers are ready to pay, you won’t know what they want or why.
- How price-sensitive people see the value affects how they make decisions. But remember that perceived value is personal and depends on personal tastes, past experiences, and the reputation of your business.
- The best pricing plan for your market is also based on how elastic demand is. When someone or a business has more money, they usually don’t want to buy a cheap product that they have to keep buying. Customers who care a lot about price usually won’t want to sign a long-term deal or pay much money upfront.
- The fact that affluent customers don’t care much about price may mean that quote-based pricing is needed. Buyers with different needs and budgets might be able to pay more for solutions made just for them.
Different steps of the buying process make your buyers more or less sensitive to price.
- The buyer doesn’t care as much about price at this stage because they only know they have a problem and not necessarily how your product will fix it.
- As part of this step, they research what they want to buy and why they need it. With a dollar sign next to the problem they want to fix, they’ll pay more attention to the price.
- Sensitivity shows up during the review stage. They are more price-conscious because they are looking at your rivals. You must show how your offering is better than other options (or do nothing).
- Once they buy, you’ve persuaded them of the financial risks of not acting and the financial advantages of your product over others.
- If you want to keep people, you must keep giving them that value. Over time, people become less sensitive to price changes when they see that entering $X gives a much larger value.
Price Sensitivity and Price Elasticity of Demand: How They Are Related
The price elasticity of demand says that some people won’t pay more if there is a cheaper choice. Economists and business leaders use this to figure out how sensitive people are to price changes on a large scale. There is a minimum price that people are willing to pay for every good or service. That’s what price elasticity of demand shows on a graph: the connection between how much the amount changes and how much the price changes.
Picture yourself at your favorite coffee shop. The price of your favorite coffee just went up by $2. You might complain, but you’ll still pay if this is the only coffee shop for miles and you need a fix. It’s called “inelastic demand” because your need for that latte doesn’t change much, even if it costs more.
There’s a coffee shop next door, so if the prices increase even a little, you might walk right over to that one. That’s a lot of elasticity; you’re not that committed to the latte to handle the price hike.
Companies try to find the best price range, or “equilibrium,” to sell the most drinks for the most money without turning people away. They use a pricing tool to find that number and keep an eye on how every penny change affects their sales.
They can make more money even if some people skip their coffee because the extra money from the die-hard latte lovers is more than the money they lose. Playing with how people act while making money for the business is tricky.
Things that make price sensitivity different
Demand vs. Lack of
If all other market factors stay the same, the rule of demand says that people buy less of what they want when prices go up. The main thing that changes this rule is scarcity.
When customers don’t care as much about price,
1. A lot of people need them too.
2. They can’t get them anywhere else.
If, on the other hand, people don’t want a product, prices will have to drop to make it more appealing.
Price and Goodness
People don’t care as much about a product’s price when it’s new or expensive. Here are some examples of this:
- The new iPhone vs. an iPhone from 2002
- A custom-made suit vs. a ready-made one
- A hip new restaurant vs. McDonald’s
- An apartment by the beach vs. one that looks out at the trash
- Software with lots of features vs. software with few tools
People usually know that “you get what you pay for.” This means that when a product says something more important than money is behind its higher price, it doesn’t change how much people want it.
Costs Compared to Budget
Naturally, not all people can buy better products. Some customers will find that the price of a product is too high at some point. We’d all like the newest iPhone, but we can’t spend $1,000 or more on one.
People are much more likely to carefully consider prices if they require a significant initial investment that fits within their overall budget.
The pros
If it concerns the bottom line, a product’s usefulness may be high enough to make the purchase worthwhile, making people less price-sensitive.
The $60 a month for a SaaS tool might help a business owner sell more items, so it’s worth it. The same reason is often given when offering agency services like digital marketing.
This also goes for things like social status or time savings that are more important to the buyer at that moment than money.
Unique Number
There are a lot of different kinds of product differences, but the main idea behind unique value is the same. These are the two main groups:
- Differentiating on the horizontal level: design, company identity, perceived value, and loyalty
- Quality, features, technology, and service are examples of vertical differentiation.
There are some real and some subjective aspects to unique value. Everything, from the colors and looks of a brand to how good it is thought to be, can affect what people buy. Maybe not all people will like your goods, but the ones who do won’t care as much about the price.
Different Products and Competitors
Customers might like one item, but if they find something “close enough” for much less money, they’ll probably choose that.
All of this comes back to how different a product is and how easy it is to get. People have more choices when there is a lot of competition and similar goods on the market. So, new companies that want to enter the market need to set competitive prices.
How much does it cost to switch?
Not only does it cost money to switch CRMs or buy a new car, but it also takes time, effort, and stress. People are more likely to notice price changes if switching from one product to another costs them more, whether that cost is money or something else.
The situation of the economy
Even in fields with natural monopolies, like flight, oil and gas, and telecommunications, customers ultimately control the market.
For instance, gas prices have gone through the roof in the last few years. But they can’t keep going up forever. Eventually, they’ll reach a breaking point where enough people will switch to public transportation or buy cars that use less gas to stop the trend. They might also stop buying it because they can’t afford it.
So, there is no such thing as demand that is “perfectly elastic” or “perfectly inelastic.”
How to Find Out How Sensitive Prices Are
You can look at data from past sales or poll possible buyers to determine how sensitive a market is to price changes.
The following are some popular ways to do a price sensitivity analysis:
- Van Westendorp’s Price Sensitivity Meter asks people several questions, like, “At what point would you consider this product a bargain?” to find out how much they are willing to pay for a product.
- Price laddering is part of the Gabor-Granger Technique. It involves asking possible buyers what price they would be willing to pay.
- A conjoint analysis finds out how much people value certain product traits and how that affects how much they are willing to pay.
- Brand-price tradeoff (BPTO) is a statistical method that asks people to pick between goods with different prices and brand associations.
Products That Are Sensitive to Price
Tools for B2B SaaS
There is a desire to buy because the average business uses about 300 SaaS apps. That doesn’t mean B2B SaaS buyers don’t care about price. It’s interesting to watch the SaaS business because the value an app gives its users is much lower than its price.
This is what the Fourth Industrial Revolution has made possible. As technology changes quickly, people value apps worth millions of dollars at just a few hundred dollars a month. This means that the best price for a product is sometimes as little as 0.0001% of its value.
Companies that offer SaaS use tiered pricing models, which can include a freebie tier, to cater to customers who care about price. Combining usage-based pricing, subscription tiers, and custom quotes for business customers is how they deal with their more significant customers.
Software companies have an edge here because SaaS pricing is based on making money repeatedly. Customers don’t have to worry about price hikes every month because they’ll always be charged the same amount. That makes them believe you and want them to stay with you for a long time.
Price sensitivity is high at the business level because switching costs a lot. It’s hard for sales reps to explain the price, which is one reason why business sales cycles usually last longer than six months.
Gas and Oil
People may start to change how they drive when gas prices go up. They might drive less, share rides with more people, or take the bus or train if the price increase is significant enough. This behavior shows that gasoline demand is very elastic; small changes in price cause significant changes in usage.
Still, sensitivity changes based on whether you look at things in the short or long run. People will still have to go to work and do their daily tasks in the short run, so they’ll complain at the pump but still fill up their tanks. In the short run, this means that demand is not very flexible.
Over time, high prices may cause long-lasting changes, like buying cars that use less gas or moving closer to work. These changes show that flexibility is higher.
Tickets for planes
People who travel often can be flexible about when, where, and even whether they need to go. If planes raise their prices, many people just traveling for fun will start looking for other options immediately. They might pick a different company, choose cheaper indirect flights, or even decide to change their minds and not go on their trip.
Business visitors may not care as much about price because they have to be somewhere at a particular time for a meeting. But with the rise of virtual meetings, even business travel is becoming more price-conscious. If the cost of flying gets too high, companies may switch from in-person meetings to virtual ones.
The high demand elasticity for plane tickets is also affected by how open and competitive the market is. Customers can easily compare prices across many companies with just a few clicks, which makes price changes even more noticeable.
Food and grocery items
Food and household items in grocery stores are naturally price-conscious because there are so many choices and a lot of competition for shelf space. Customers can easily compare prices and have many options, so shops must keep their prices low to stay in business.
It’s not true that all grocery items are price-sensitive. Because people always buy staples like milk, bread, and eggs, these goods tend to be more flexible. Also, they go bad quickly, so the seller only has a short time to get them off the market.
Demand for luxury or specialty goods is less flexible. People who buy from them are ready to pay more for unique or high-quality items, like tanks.
Using data on price sensitivity to help set prices
How do you use the information you’ve gathered about how price affects people once you’ve done market research and gathered it?
These are the main points:
- Know who you want to sell to. It’s essential to know how price-sensitive your target group is. Surveys or focus groups can be used to get this knowledge.
- Think about different ways to set prices. You might want to look at different pricing models for the same goods, depending on how flexible the demand is. Some examples of this are tiered prices, discounts for buying in bulk, or pricing based on subscriptions.
- Keep an eye on market trends. Watch out for changes in customer behavior and market trends as a whole. This will help you make any necessary changes to your pricing plan.
- Always ask for comments. Don’t just rely on the price sensitivity data you got at first; keep getting customer feedback to see how your prices affect their buying decisions.
- Don’t use deals and discounts too often. You might get more people to buy or raise demand in the short term, but you’ll also lower the value of your product and teach customers to wait for sales, which could hurt your long-term profits.
- Sell how much it costs not to use your product. Your customers’ pain points will become apparent to you quickly if you use a sales method like Medid or Squared. You can make these points when trying to get past complaints based on price sensitivity.
