Do you know how changing the price of a product can affect consumer perception? Different customer segments are willing to pay different prices for the same product. In other words, the consumer price sensitivity is the relationship of a consumer with the changes in prices.
Since price is an important factor in making a decision to purchase a product, some customers are more impacted by it than others. For instance, when a product adds a feature and therefore raises it’s price, some consumers are more prone to continue buying the product.
However, there are consumers who do not react well to price increases and either stop buying the product or switch to a competitor. These are sensitive customers. The same person may be sensitivy for one kind of product and not so much for another.
Sensitive customers may consider, for example, that a product costs more than it is worth. Or the opposite, have a negative perception of brands because the price are lower than the market. So, the consumer price sensitivity tries to take into account several aspects related to market dynamics and consumer perception.
How sensitivity affects pricing strategy
One of the goals of strategic pricing is to arrive at a satisfactory price for customers with high sensitivity. Therefore, consumer price sensitivity is precisely a way to measure the customer’s reaction to the established price.
The model to measure the sensitivity of a customer is the Price Sensitivity Meter, developed by the economist Van Westendorp. To consolidate the method, he interviewed consumers and defined an acceptable price rate for them.
With Westendorp’s model, it is possible to determine price ranges that customers with different sensitivities are willing to pay and set a price that meets the different expectations. In addition, one of the first gains of the method is to determine what types of customers are consuming the product.
After that, one possibility is to adopt the Good Better Best strategy, which consists on having different products, with different prices and features, that cater to the most and least sensitive customers.
Another goal of sensitivity analysis is to determine the segments of the public that consume your product in order to maintain price competitiveness. Certainly, Price decisions directly affect a company’s sales volume. Since it influences, demand, profitability of the activity, product perception, and brand positioning.
Conducting a consumer price sensitivity analysis
First of all, when you are trying to find out acceptable prices for your consumers, the Van Westendrop method suggests asking questions such as:
- At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
- At what price you consider the product to be so low priced that you feel the quality isn’t very good? (Too cheap)
- At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
- At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)
This will help establish which prices are perceived by your consumers as too cheap, resulting in an idea that the product isn’t very trusthworthy. And also, the price perceveid as too expensive and therefore, not offering a diferential to the consumer.
In conclusion, the method will help find a acceptable price range for your consumer base. In this area, both the sensitive and the insensitive client are covered. But that’s not enough to find the ideal price for a product.
The next steps can help clarify the pricing process:
- Selecting the purpose of pricing.
- Determination of demand.
- Estimating costs.
- Analysis of competitors’ costs, prices, and supply.
- Choose a pricing method.
- Selection of final price.
Sensitivity can be affected by issues such as reference price, ease of product comparison, switching costs and fair price sentiment.
Taking into account the sensitivity of the consumer audience is one way to maximize sales and improve profitability. By knowing that different customers behave in different ways, you can create and price products that appeal to the majority, optimizing sales volume and keeping the customer loyal.
How can Tie help you define the best pricing strategy?
With Artificial Intelligence and statistical analysis, we can help you determine what’s the best pricing strategy for your business. Considering among others things the consumer price sensitivity of your clients. With Tie, part of the Supply Brain, we can:
- Break-even elasticity analysis;
- Recommendations for price adjustments;
- Price adjustment for market-share margin optimization;
- Product recommendations for promotions;