Understanding price sensitivity: impact on consumer choices and sales

Think of a product from a brand you like. If its company significantly reduced the price, would that impact your purchasing behavior? The answer depends on your price sensitivity. 

Market researchers track price sensitivity to understand how much consumers value a product against its price. When entering new markets, companies can use this metric to make informed pricing decisions that increase profitability. 

In this guide, we’ll explore how businesses increase profits by tracking customer price sensitivity. We’ll also share how to calculate price sensitivity during a price analysis.

Price sensitivity measures how a product’s price impacts consumers’ purchasing behaviors. It defines how important price is to your target audience relative to other product criteria like quality, functionality, or aesthetics. 

Market researchers measure price sensitivity with price elasticity of demand, which assesses how the change in demand shifts with price changes. For example, if small price changes greatly affect consumer demand, the product is price elastic; if demand remains mostly unchanged, it is price inelastic.

Companies analyze price sensitivity to make informed pricing decisions. High price sensitivity indicates that a significant price increase can reduce sales, while price insensitivity may not impact sales much.

Price insensitivity occurs when a product’s price does not impact consumers’ buying behaviors. It’s also known as “low price sensitivity.”

Common products and services with low price sensitivity include electricity, water utilities, and gasoline. People will not stop using these products even if prices rise slightly.

Price-insensitive consumers often demonstrate strong brand loyalty and purchase products with unique attributes, prestige, or exclusivity regardless of price. 

When your target audience is price insensitive, you can generally price products higher since price increases have little impact on their demand. You’ll need to adjust your pricing strategy when marketing to these customers to ensure your pricing is consistent with expectations.

Several factors influence price sensitivity, including: 

Your pricing strategy must account for one or several factors to effectively market your product to your target audience. When conducting market research, use a combination of methods, such as surveys, focus groups, and interviews, to determine how consumers feel about your product and its pricing.

Calculate price sensitivity by dividing the percentage change in demand by the percentage change in price:

Price sensitivity = % change in quantity demanded  / % change in price

The higher the number, the greater the consumer price sensitivity. 

Let’s try an example:

If a company increases the price of its cereal by 40% and sees a 20% decrease in purchases, we’ll know the cereal has a price sensitivity of -0.50%.

Price sensitivity: -20 (% decrease in quantity demanded) ÷ 40 (% increase in price)  = -0.50

In this scenario, the company can conclude that the cereal has a high price sensitivity. According to this calculation, for every 1% price increase, the business can expect a 0.50% decline in sales. 

Other methods for calculating price sensitivity include: 

Developed in the 1970s by Dutch economist Peter van Westendrop, the Van Westendorp Price Sensitivity Meter is a common tool market researchers use for price analysis. 

To conduct a Van Westendorp analysis, design and deploy a survey that asks consumers four main questions about when they perceive a product to be too cheap, cheap, expensive, and too expensive:

The goal is to determine the acceptable price range and the optimal price point for consumers. For example, after analyzing survey results, you may find that the optimal price point for your cereal is $4.99, just below your customers’ price ceiling. 

Benefits of using the Van Westendorp Price Sensitivity Meter:

Limitations include:

Related: How to use the Van Westendorp Price Sensitivity Meter

Pricing surveys are a highly effective way to collect data and measure consumer price sensitivity. In-person interviews and focus groups also allow researchers to collect real-time data and observe nonverbal cues. 

Conjoint or trade-off analysis measures price sensitivity by examining factors influencing consumers’ buying behavior. In a conjoint analysis survey, consumers rank the importance of a specific set of features or choose between competing features and prices.

Sample size and demographic representation are significant when creating and analyzing surveys. Use a sample size calculator and SurveyMonkey Audience to identify your target market and reach the right consumers. 

SurveyMonkey Audience provides a highly targeted, representative panel of consumers to collect rich data, including reasonable price ranges, purchasing behaviors, and willingness to buy.  

Turn this data into actionable insights to help you find your product’s optimal price point. Your survey results can highlight when you need to adjust prices or marketing strategy.

Pricing insensitivity is only one factor that can impact pricing strategy. To better understand and appeal to your target audience, consider these additional pricing factors: 

Use data from price sensitivity surveys to determine the optimal price point, i.e., the point at the intersection of revenue and demand. Your optimal price point is the “sweet spot” that maximizes profitability while offering products at a price customers are willing to pay.

Multiple target audiences may have varying levels of price sensitivity. In this case, you should carefully consider the expectations of different audiences to decide on a reasonable price.

Competition and current market trends can impact your audience’s price sensitivity. Consumers may switch to a competitor brand if they prefer its price or estimate its value highly.

To develop an effective pricing strategy, consider the average price point among your competitors. The aim is to avoid pricing your product out of the market by making it too expensive or so cheap that you sell at a loss. 

Market changes occur constantly. Influence from celebrities, inflation, supply chain issues, and other factors can affect product prices. To remain competitive, your pricing strategy must be flexible and able to adapt to sudden changes. 

Not all products use the same pricing strategy. You’ll need to tailor your approach to the product’s lifecycle, uniqueness, and competition level.

Use consumer insights to determine the best pricing strategy for your product. For example, a footwear and accessories company might use penetration pricing for its new, unique sneakers while utilizing a different strategy, such as bundling, to boost accessory sales.  

Related: Top 7 pricing strategies and when to use them 

Leverage survey insights to determine which pricing strategies will be most effective for your brand. Common pricing strategies include: 

Penetration pricing is a strategy in which a business initially prices a new product low to attract customers. This strategy allows businesses to “penetrate” the market and attract their competitors’ customers. 

The goal is to entice customers and keep them around once the price increases. An example is a subscription-based business that offers a discounted rate for the first month and then raises the standard rate.

Contrary to penetration pricing, price skimming introduces a new product at the highest price customers will pay. The business lowers prices after early adopters become satisfied and competitors enter the market. The company continues lowering prices bit by bit to attract more price-sensitive customers.   

Bundle pricing is a familiar concept that pairs multiple products together for a slight discount. In bundle pricing, customers can buy each product at its set rate or purchase the bundle to save. Bundling increases customer spending while making them feel like they got a great deal.  

Dynamic pricing adjusts prices in real time based on demand and market conditions. Dynamic pricing is a common strategy for ride-sharing apps, flight tickets, Amazon sellers, and theme parks.

For example, Uber uses dynamic pricing, analyzing several data points, such as your phone battery, to determine price insensitivity. If your phone is about to die, a surge price is less likely to impact your decision to order an Uber. 

Value-based pricing sets prices based on what a business believes customers will pay rather than production costs. Art, fine-dining restaurants, and designer accessories are examples of businesses that use value-based pricing.

Use these best practices to find your products' most advantageous pricing strategy:

Price sensitivity isn’t universal among your target audience. It relies on consumers’ individual preferences and attitudes. 

Various factors influence price sensitivity and consumer behavior, such as: 

Price changes significantly impact a product with high price sensitivity. Consumers with high price sensitivity are likelier to change their behavior depending on a product’s price.

For example, a consumer’s willingness to buy a specific brand of toothpaste will likely change if the price increases. Plenty of other toothpaste options offer cheaper alternatives. 

Lack of brand differentiation also contributes to consumers' higher price sensitivity. When a product and its associated brand offer something unique, it builds customer loyalty. Other products that exhibit high price sensitivity include: 

Manage high price sensitivity using competitive pricing models or offering lower-priced options for this audience.

Price changes, whether increases or cuts, do not significantly impact sales of products with low price sensitivity.  Consumers with low price sensitivity value brand loyalty and prefer quality over price. 

For instance, consumers who are shopping for luxury goods aren’t as affected by price changes. The perceived value of the luxury product stays the same. Other products that exhibit low price sensitivity include:

Businesses can leverage premium pricing and brand positioning for products with low price sensitivity. 

Price sensitivity is critical in consumer purchasing behavior and influences a company’s bottom line. Understanding price sensitivity enables companies to develop effective pricing strategies to maximize profits and stay competitive.

By following best practices for developing pricing strategies and using common strategies, you can reduce price sensitivity and increase revenue. Use market research pricing surveys to make data-driven decisions and adjust your strategy accordingly. Monitor how customers respond to your pricing strategy with SurveyMonkey Audience.