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What is price sensitivity?

Price sensitivity is the relationship between the price of goods and services and the willingness of consumers to buy those goods and services. In its essence, price sensitivity looks at how demand changes with price.

In this article we define price sensitivity, learn how to measure price sensitivity and view some examples of price sensitivity use cases.

There are several factors affecting a consumer’s willingness to buy a good or service such as need, availability and the product’s value. 

Not all consumers are the same. Those seeking quality will be less sensitive to price changes. Others may be more frugal and focus on price.

Price sensitivity varies between industries. Consumers tend to be less sensitive to prices of essential items such as medicines. Pharmaceutical companies generally keep their products at reasonable industry-standard prices to avoid competitive pressures and government regulatory actions.

Consumers may also be less sensitive to prices when a product or service is considered exclusive or limited. This is typically seen in sectors such as luxury goods and premium services. For instance, online retailer StockX sells limited-edition Nike sneakers at over a 100% premium to their original price. While some of us may frown at the sight of a pair of trainers for $600, enthusiasts and collectors are prepared to pay.

Price sensitivity also factors in competitiveness in the market, taking into consideration a product’s essential or unique aspects.

How to calculate price sensitivity?

Price sensitivity is measured using price elasticity of demand in economics. Price elasticity of demand measures changes in demand after changes in price.

Here is the price sensitivity formula:

Price sensitivity formula

What is price sensitivity affected by? If the quantity of product demanded changes more than the price changes, then the product is said to be elastic. This could indicate that there are substitutes for the product that consumers can turn to when the price changes. For example, toothpaste, biscuits and restaurants.

If the quantity of product demanded changes less than the price change, the product is said to be inelastic. Here a price change doesn’t lead to a significant change in demand for the product. For example, petrol, diesel and natural gas.

If the quantity of product demanded is equal to changes in price, the product is considered to have unit price elasticity.

Price sensitivity meaning: Use cases

Businesses conduct price sensitivity analysis of consumers to correctly price their products for maximum demand and price competitiveness.

“Getting pricing right is critically important; it can be the difference between winning in the market with a differentiated value proposition and unnecessarily sacrificing profitability—or even triggering a self-defeating price war,” said Boston Consulting Group (BCG) in a report.

According to a survey conducted by BCG, the company concluded that Japan and France have the lowest proportion of price-sensitive consumers, while India has the greatest proportion.

BCG added that demographics are “less influential than one may assume” when it comes to price sensitivity, however the consulting company said that age of the consumer is a significant factor, noting:

“A significant difference maker is context, or the situation at the time of purchase. More consumers responded that they are likely to choose the lowest-price option when purchasing apparel for their children or spouse than for themselves, for example. And twice as many consumers are price sensitive when the item is a gift than when it is not.”

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