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Price Sensitivity: What is it and How to Calculate it? | Maction
Analytics

Price Sensitivity: What is it and How to Calculate it?

Businesses can make better judgments about how to price their products and services via price sensitivity research, ensuring that they are competitive and producing more revenue. But, what exactly is price sensitivity, and why does it matter?

What is Price Sensitivity and How Does it Work?

Price sensitivity refers to how a product’s price affects a customer’s choice to buy. Price elasticity of demand is another name for it. This refers to the extent to which a product or service’s selling is impacted. In general, it refers to how demand shifts when product costs shift.

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The price elasticity of demand, or the measure of demand change as a function of price change, is a standard way to assess price sensitivity. Some customers, for example, are unwilling to spend a few cents more per gallon of gasoline if a lower-cost station is close.

Price Sensitivity Measurement Methods

The key is to have a thorough understanding of your target market and buyers. They will all have various price sensitivity because they will evaluate the worth of your offering differently. As a result, to ensure that the data you collect is representative, you should test the price sensitivity of each of your market categories separately.

After you’ve segmented your target market, you’ll need to establish an approach that goes beyond simply asking individuals “How much would you pay for product Y”? It is nearly impossible for people to precisely estimate their desire to pay on a cognitive level, which is why academics have devised methods to circumvent this mental barrier.

A. Price Laddering Method

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Price laddering is polling potential buyers about their willingness to buy a specific product at a specific price, which is usually ranked on a scale of 1 to 10. If the respondent’s intent to purchase falls below a certain threshold (typically 8), the price is reduced and the respondent is asked again about their willingness to purchase.

Although this process may theoretically continue on indefinitely, respondents are usually only asked about a maximum of three price points to avoid unnecessary response bias. After that, the data is evaluated to see what percentage of the market would buy at any particular price.

The benefit of pricing laddering is that it eliminates the requirement for survey respondents to propose any price points. Instead, users need to match their aim to a sliding scale, which makes the survey simple to complete.

Unfortunately, while respondents are asked about their purchase intentions at increasingly lower price points, the ease of price laddering might also be its disadvantage. It’s all too simple for them to approach the survey like a bargaining chip, which can skew your results. Price laddering means that not all respondents will contribute to your pricing research efforts because some respondents may decline to purchase at any of the price points you provide.

To summarise, these disadvantages mean that an efficient and statistically significant price laddering campaign typically necessitates a big number of survey respondents, which is a huge hurdle for many businesses without a large client base.

B. The Price Sensitivity Meter of Van Westendorp

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The Price Sensitivity Meter by Van Westendorp handles the challenge of determining price sensitivity by polling people about their willingness to pay in different price ranges. Four questions are asked of each survey respondent:

  • At what point would you consider the product to be too pricey to consider purchasing? (It’s too costly.)
  • When would you consider a product’s price to be so low that you assume it’s of bad quality? (It’s far too inexpensive.)
  • At what point would you consider the product to be starting to get expensive, to the point where purchasing it is no longer a no-brainer but something you’d have to consider? (Affordable/high-end)
  • At what price do you think the product is a good deal—a good value for the money? 

The first two questions force respondents to settle on a price range that they can live with, while the latter two questions help to narrow down the best price range. You can graph the replies and derive an optimal price band and a more particular optimal price point once a statistically significant number of people respond to these questions.

Van Westendorp’s method has a distinct advantage in terms of efficiency when it comes to creating price sensitivity for relatively new commodities. Each Van Westendorp survey respondent will provide further insight into your product’s price sensitivity, allowing you to collect data faster by minimizing the number of survey respondents required.

 The price sensitivity meter is also the only measure that takes into account low price points that cause customers to doubt the product’s quality. As a result, Van Westendorp’s conclusions are far more comprehensive than those produced using price laddering.

The disadvantage of Van Westendorp is that it might be difficult for businesses to manage and analyze. This is why we designed our software to make the process go more smoothly.

C. The Gabor – Granger Pricing Method

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The Gabor-Granger pricing approach is a straightforward and effective pricing research method for determining an acceptable price for a given product or service among respondents. Following the introduction of the product, respondents are exposed to a randomly selected price from a predefined pricing list.

The respondent is asked if they are willing to pay the provided price for the goods or service. If the respondent selects yes, the product is displayed once more, but at a higher price from the predetermined price list.

If the respondent refuses to buy the item at the first price, it is shown again at a lower price from a predetermined list. This practice is repeated until the maximum price point that a respondent is willing to pay is established.

What is the formula for calculating price sensitivity?

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The percentage change in the quantity required divided by the percentage change in price is how price sensitivity is calculated.

Consider this example of price sensitivity: when apple nectar costs in a local plant rise by 60%, juice purchases drop by 25%. We can easily compute the price sensitivity of apple nectar using the algorithm above. The following are the ingredients in apple nectar:

Price Sensitivity = – 25 percent / 60% = – 0.42.

As a result, we may conclude that each percentage rise in the price of apple nectar influences the purchase by nearly half of that percentage. Similarly, all items can be evaluated in terms of price changes and demand increases or decreases.

Those products are said to be price-sensitive when the price fluctuates only slightly but has a substantial impact on demand. This is frequently the case with things that are convenient or have a variety of options.

Price inelastic products are those that aren’t extremely responsive to price changes. Consumers have no choice but to acquire such products because they are everyday items.

The Bottomline

Remember that there is no one-size-fits-all approach to measuring price sensitivity, regardless of your methodology. People’s ideas of value vary considerably from person to person, therefore the data you collect is necessarily reliant on those perceptions. Pricing research, on the other hand, is an iterative process. It’s all about protecting yourself from the unknown in order to reveal the genuine worth of your goods. Market research can help you ascertain price sensitivity to price your product correctly. Maction can help you with powerful and actionable market research insights. Book a call with Maction today.