Price sensitivity


This is one of the customer behaviors that confront a marketer. At what price level does the customer become sensitive to price changes? Which customers who are highly price sensitive? How to measure price sensitivity? These are difficult question that a marketer has to answer. Nagle has identified nine factors that contribute to price sensitivity and has also presented various methods or techniques to measure it. The factors that contribute to price sensitivity are:

1. Unique Value Effect
More unique the product, lower is the price sensitivity.

2. Substitute Awareness Effect
If the buyers are aware of substitutes and these perform the same function, then the buyer’s price sensitivity will be high.

3. Difficult Comparison Effect
Price sensitivity will be low if the buyer has difficulty comparing two alternatives.

4. Total Expenditure Effect
If then expenditure on the product represents a low proportion of the consumer income, the price sensitivity will be less visible for such a product.

5. End- Benefit Effect
Buyers are less price sensitive where the expenditure on the product is low compared to the total cost of the end product.

6. Shared Cost Effect
If the cost of the product is shared by another party, the buyer will have less prone to price sensitivity.

7. Sunk Investment Effect
Price sensitivity is low in products which are used along with assets previously bought.

8. Price Quality Effect :
Higher the perceived quality of the product, lower the price sensitivity.

9. Inventory effect
If the product cannot be stored, the buyer will be less price sensitive.

Technique to Measure Price sensitivity

One of the techniques used by measure price sensitivity is controlled experimentation.. Here assumption is that competition does not change and there will be no qualitative difference in its strategy. In this experiment, customers are offered different prices. Customers’ responses are collected. Now, the firm’s brand prices are changed and customers’ response at each price level is recorded. The price level at which the demand starts declining is the point at which price sensitivity sets in. This level will vary depending on the nature of the product and the buyer characteristics. The problem with this approach is that in actual reality competition does change its price and other non-price variables to fight the leader.