Price Sensitivity – Definition

Cite this article as:"Price Sensitivity – Definition," in The Business Professor, updated January 10, 2020, last accessed October 23, 2020, https://thebusinessprofessor.com/lesson/price-sensitivity-definition/.

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Price Sensitivity Definition

Price sensitivity is a concept in consumer behavior theory that reflects how changes in the prices of products affect the demand of consumers for the product. Price Sensitivity reflects the value consumers place on price and when a change occurs in the price of a product, their behavior towards the product changes.

Price sensitivity is also called the elasticity of demand, which measures a change in the demand of products as a reaction to a change in the price of the product. Changes in the cost of producing a good cause a change in the price of the product, which in turn, affects consumers’ purchasing behaviors.

A Little More on Price Sensitivity

Price sensitivity is an important concept that companies must pay attention to in order to continually have high demand for their products. Usually, consumers place a high value on money to the extent rat when the prices of goods go up, most consumers become unwillingly to pay an extra penny regardless of the reason for the change in price. Price is not the only purchasing criteria, but consumers tend to place more importance on price.

The price sensitivity of consumers affects the sales of products and services, and overall, the performance of the company.  It is important to know that price sensitivity varies from one consumer to another, the same way not all consumers exhibit the same purchasing behaviors.

To calculate price sensitivity, the following formula is applicable;

Price Sensitivity = % Change in Quantity Purchased / % Change in Price

Price Sensitivity and Elasticity of Demand

Price sensitivity is often called elasticity of demand, although, both have slight differences as price sensitivity can be a cause for the elasticity of demand. When there is high elasticity, it is an indicator that consumers are willing to pay more for a product given an increase in price, Inelasticity, on the other hand, shows how consumers’ demand for a product can decline given a slight increase in price.

Businesses and manufacturers of products often pay attention to price sensitivity and strive to set market prices that lead to an equilibrium price.

The key takeaways of price sensitivity are;

  • Price sensitivity refers to a change in consumers’ purchasing behaviors as a result of changes in the prices of goods and services.
  • Price sensitivity is a consumer behavior theory that shows the reaction of consumers when the cost of a product changes.
  • Price sensitivity varies from one consumer to another, while some consumers are willing to pay more when there’s an increase in the price of a product, some consumers are not willing to pay an extra cost.
  • Price sensitivity is also called elasticity of demand.
  • This concept reflects how much importance consumers place on price over other purchasing criteria.

Influences on Price Sensitivity

There are certain considerations for price sensitivity, it is often noticed in the market that price sensitivity has an impact on competition amongst businesses and the entire buying habit. Generally, the uniqueness of a product or service determines how much price sensitivity consumers would exhibit.

When a product stands or among other products or is scarce, consumers are less price-sensitive to the purchase of the Priddy. They are willing to pay extra for such products. Businesses with a good understanding of price sensitivity leverage it to stay ahead of other businesses in terms of competition.

Furthermore, when consumers earn a higher income, they are less price-sensitive. Exclusive products or products that add to the class and prestige of consumers also witness less price sensitivity.

Pricing Strategy

Different consumers have different sensitivities to prices, it is important that companies understand the consumers and determine how much sensitive they are to prices of goods and services. This analysis helps a company arrive at better prices for goods. Also, some sales experts develop strategies that help consumers shift their attention away from the prices of products but rather of the value of the products.

Different industries also use different price strategies based on certain factors and the price sensitivity of consumers to the price of the goods and services they offer.

References for “Price Sensitivity

https://www.readyratios.com/reference/analysis/price_sensitivity.html

https://www.investopedia.com › Insights › Markets & Economy

https://investinganswers.com/dictionary/p/price-sensitivity

https://smallbusiness.chron.com › Running a Business › Business Basics

www.businessdictionary.com/definition/price-sensitivity.html

https://simplicable.com/new/price-sensitivity

 

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