What is the insensitive to price change?
With the help of price sensitivity analysis, companies can make better decisions on how to price a product and services, assigning them the right price and also allowing them to be competitive and increase their revenues. But, what is price sensitivity and why is it important? Show
Price sensitivity is the way in which the cost of a product affects consumers’ purchasing decisions. It is also known as price elasticity of demand. This means the extent to which the sale of a particular product or service is affected. In general terms, it is how demand changes as the cost of products changes. Price sensitivity is commonly measured using the price elasticity of demand or the measure of the change in demand as a function of its price change. For example, some consumers are unwilling to pay a few cents extra per gallon of gasoline, especially if there is a lower-priced station nearby. The consumer decision-making processBefore understanding how the price sensitivity process works, it is extremely important to understand the consumer behavior when going through their buying decision process:
Factors that affect price sensitivityFor organizations, price sensitivity is a crucial factor in making the best decisions and assigning the ideal prices, so it is essential to understand the consumer’s mindset and behavior. Here are some of the elements that are considered as determinants by consumers when purchasing a product or service.
Methods to measure price sensitivityThe key is to have a deep understanding of your target audience and the people who buy. Each of them will perceive the value of your product differently, which means they will have different price sensitivities. As a result, you should measure the price sensitivity of each of your market segments independently, so that the data you collect will be representative. After segmenting your target market, the next step is to choose a methodology that goes beyond simply asking people “How much would you pay for product X”? Cognitively, it is almost impossible for people to accurately measure their own willingness to pay, which is why researchers have invented techniques to get around this mental block.
Price laddering involves asking potential customers about their intention to buy a specific product at a particular price, usually ranked on a scale of 1 to 10. If the respondent’s intention to buy response is below a particular threshold (usually 8), then the price is low, so he or she is asked if he or she intends to buy again. In theory, this process can continue indefinitely, but respondents are only asked about a maximum of three price points to avoid excessive response bias. Subsequently, a data analysis is performed to determine the percentage of the market that would buy at any given price. Van Westendorp MethodThe Van Westendorp question addresses the problem of measuring price sensitivity by surveying people on their willingness to pay in ranges. Each consumer is asked four questions:
The first two questions force respondents to anchor to an acceptable price range and the last two questions help narrow down an optimal price range. Once a statistically significant number of people respond, you can plot the responses and determine a more specific optimal price point. The Van Westendorp question offers a clear efficiency advantage in determining the price sensitivity of relatively new products. It will also provide additional information about the price sensitivity of your product, which speeds up the data collection process. In QuestionPro you can apply the Van Westendorp question and have the answers plotted in real time so you can better visualize the results. The price sensitivity meter is also the only method that figures in price points that are cheap to the point where customers begin to question the quality of the product. This makes the results obtained from Van Westendorp much more comprehensive than the results obtained from the price scale. Gabor-Granger Pricing TechniqueGabor-Granger pricing technique is a convenient and practical pricing research method to work out an acceptable price that respondents can pay for a given product or service. In this approach, respondents are exposed to a randomly chosen price from the predetermined price list after introducing the product. The respondent is asked for a willingness to purchase the product or service at the given price. Suppose the respondent is willing to buy the product at that price, then the product is shown again, but this time with a higher price from the predetermined price list. If the respondent is not willing to get the merchandise at the primary price shown, the merchandise is shown again with a lower cost from the predetermined list. This pattern is iterated multiple times until the highest price point a respondent is willing to pay, is determined. Key differences between Gabor-Granger modeling & Van Westendorp price sensitivityThe Gabor-Granger is most often used for already existing products. This model gives a directionally correct price estimate for willingness to pay for your product or service. It provides the revenue optimum price point, demand curve, and price elasticity, which helps researchers price a product right. This method is useful only when you want to look at your brand without considering the competition. This model works with limited predefined price points. The Van Westendorp is most often used for new product pricing. Use Van Westendorp when you are unsure what price points the market can potentially accept. This model works on a whole spectrum of cost. It will provide users with an acceptable price range. It will help to understand the respondents’ attitude towards a product or service. Pro’s & Con’s of the Gabor Granger Pricing TechniqueThe Gabor-Granger method results in a comparatively low survey effort and is straightforward to create and deploy. This pricing technique provides information that is crucial about how much a consumer can pay for a product and the perceived value to respondents. Hence, it has become a vital tool in pricing analytics. One definite drawback that we have seen with the Gabor-Granger technique is that competing products are ignored in the study phase. This means that if a competitor offers a similar product at a lower price, your research’s price point invalidates your study. The above fallacy renders studies useless as they have no context over market conditions. To mitigate a negative effect on the pricing study, showing a shelf with competitors’ products and prices allows respondents to have comparable price points. Studies have shown that Gabor-Granger results are much closer to actuals when competitors’ products and prices are showcased upfront. The Gabor-Granger method is particularly suitable under the following conditions:
As seen above, the Gabor Granger pricing method is a required survey research method in pricing and consumer research for price elasticity. An excellent example of the Gabor Granger modeling and a case study of our existing clients is as follows. How to calculate price sensitivityPrice sensitivity can be measured by dividing the percentage change in quantity demanded by the percentage change in price. To observe price sensitivity, let us consider that when apple nectar prices in a local factory increase by 60%, juice purchases fall with the figure of 25%. Using the above formula, we can easily calculate the price sensitivity of apple nectar. Apple nectar is: Price sensitivity = -25% / 60% = -0.42. Therefore, we can conclude that for every percentage by which the price of apple nectar increases; it affects the purchase by almost more than half of the percentage. Likewise, all products can be studied taking into account changes in price and increase or decrease in demand. Those products are said to be price sensitive where the change in price is not much, but demand is affected on a large scale. This is usually the case with convenience products or products that have a wide range of alternatives. Products that are not very reactive to price change are called price inelastic. Such products are usually products of daily use and consumers have no choice but to buy them. Tips for assessing price sensitivityRetailers use several approaches to assess customers’ level of price sensitivity. To ensure the success of the process, we have the following tips for you:
Importance of knowing price sensitivityKnowing your product’s price sensitivity will help you determine how much value you are creating in it by revealing your customers’ willingness to pay. Without understanding price sensitivity, you have no way of knowing whether your product development efforts are producing increased value, i.e., whether customers are actually interested in the features you are creating. Regardless of the methodology, keep in mind that there is no magic strategy for determining price sensitivity. The data you collect is based on perceptions of value that can vary dramatically from person to person. QuestionPro’s Pricing Research Software can help you conduct a price sensitivity test so you can get the data you need to make better marketing decisions for your product or service. Get a free 10-day trial. No credit card required. What are price insensitive customers?2 a price-insensitive customer is not influenced by the price of a product when choosing whether or not to buy itTheatre owners are trying to target price-insensitive customers.
What are examples of goods that are price insensitive?From Longman Business Dictionaryˌprice-inˈsensitive adjective1 a price-insensitive product is one that sells in the same quantities, whether the price is high or lowBasic foods, water and housing are price-insensitive products, which are viewed as necessities of life.
What is it called when demand is not sensitive to change in price?If consumers are relatively sensitive to price changes, demand is elastic. If they are relatively unresponsive to price changes, demand is inelastic.
What is sensitivity to price?What is price sensitivity? Price sensitivity is a measurement of how much the price of goods and services affects customers' willingness to buy them.
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