Knowing Price Sensitivity in Customer Behavior

Have you ever wondered, “What is the best price for a product that is just about to be released?” or “Will drastic price reductions reduce consumer interest in the product?”

Both may seem like tough questions, but you can know the answer to the question if you understand the concept of price sensitivity. This will help you to identify the appropriate pricing for the product.

Price sensitivity is defined as how much the price of a product affects consumer demand or willingness to buy. High consumer price sensitivity means that there is a strong relationship between price and consumer demand.

Then when prices increase substantially, sales will fall. On the other hand, if the price of an item is too low, sales may still be unaffected by price changes.

Why should you measure price sensitivity?

Many brands experience a situation where the product is in great demand and attractive, but in fact the product does not sell at all. This breaks the assumption that if they want to drive sales, brands can cut prices and sell products at lower prices.

Some consumers with higher incomes may feel that looking for products with attractive offers, such as discounts or cashback systems is not worth their time. Meanwhile, consumers who have lower incomes tend to look for cheaper products.

However, this does not mean that consumers always want cheap products. For example, for certain goods, consumers unconsciously already have an acceptable price range, so when the price of a product is too expensive or even too low, consumers will have suspicions and assume "too good, to be true."

From this it can be seen that consumers have a lower limit and an upper limit on a product, and once the price falls beyond that limit, the consumer's willingness to buy will also decrease.

Therefore, price sensitivity is very important for brands, because without knowing the price sensitivity of consumers, you can lower the price of the product below the threshold resulting in falling sales levels.

On the other hand, measuring price sensitivity can help you understand the highs and lows. Knowing this price limit will give you the flexibility to control product prices within a range that is acceptable to your market.

How to find price sensitivity

Finding the optimal price for your product is a complex and not easy process. To find the answer, many companies use one of the pricing strategies, namely cost-plus pricing or competitive pricing.

1. Cost-plus pricing

A strategy that requires companies to make regular adjustments as costs increase, such as rental rates. This strategy requires you to calculate a cost basis and add a mark-up percentage. This is usually used to achieve a target revenue or profit level.

2. Competitive pricing

In the process, this strategy, also known as market-based pricing, looks at pricing based on prices set by competitors. This is based on the assumption that competitors already know the right price for the product.

However, both of these strategies have the same drawback, namely the absence of calculations or information regarding the willingness of consumers to pay a predetermined price. Even after prices are compared with competitors or marked up, there is still a possibility that consumers will not buy the product or they may buy the product, but not in a way that optimizes sales levels.

In addition, this pricing strategy is very subjective, because it relies heavily on management's judgment, so even if you have used a pricing strategy, but still don't consider the consumer, it means that you have wasted the best sources for your product.

In short, understanding the trend of highs and lows prices can influence consumer behavior. This will also help you come up with a good pricing strategy that can ultimately increase profits for your brand.

The future of the product and the company is greatly influenced by setting the right pricing strategy. Through the Marketing Pricing Strategy program, stakeholders can work well together to align interests between finance, marketing, sales and production.