How to Determine Price Sensitivity? Analysis

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How to Determine Price Sensitivity? Analysis

The marketing mix, commonly referred to as the 4Ps (Product, Promotion, Place, and Price), helps capture the value for a firm's chosen customer segments. The first three variables of the marketing mix represent the cost to the firm. The role of pricing is to tap into the value created and generate revenues. If the price setting or pricing is done right, then the revenues will help fund the firm's cost and enable current and future value-creating activities like research and development, and generate a profit.

One key element in determining the price is "Price Sensitivity" (PRS), also referred to as "Price Elasticity of Demand". This sensitivity varies across customers, time and products. PRS analysis seems pretty intuitive. But firms need a structured approach which can help judge the PRS. There are at least 3 major factors or elements that influence / determine price sensitivity:

• THE MAGNITUDE (ABSOLUTE AMOUNT) OF THE PRICE: The PRS is greater for high-cost categories than for low-cost categories. For example, a 10% price differential on a sports car will have a far bigger impact on the buyer than a 10% price differential on a tube of toothpaste. The PRS increases with the absolute monetary cost of the product. In other words, if the aggregate cost of the product goes up, the PRS also increases.
• WHO PAYS? A customer can be sensitive for the price of products he pays for and not/less for other products. For example, in the case of an automobile for personal use, the car user is also the one who pays. When the automobile is given to him/her by the company, he/she is not paying for the same. Also, there are other situations when the product's user doesn't pay the entire amount but pays partly. For example, the user pays only part of his health insurance, and the company pays the remaining amount. Thus, the user will have a lower PRS than if he would have to pay the entire amount.
• COMPETITIVE FACTORS: The PRS will be higher when two products don't have significant perceived differences. Also PRS is higher when it is easy to compare products and their prices. Similarly, PRS also increases when it is easy for a buyer to switch between products. Difficulty in switching can arise due to actual, economic reasons (for example: if a penalty or a loyalty program is involved) and psychological reasons (for example a higher perceived risk or a desire to stick with a familiar brand).

⇒ Please help to make this topic more complete. What are your thoughts on analyzing price sensitivity?

Source: Dolan, R.J., and Courville, J. T. (2009), "Principles of Pricing", Harvard Business School Publication, 9-506-021.

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		2 Parag Utekar Student (MBA), India
	Zones or Levels of Of Price Elasticity Here is some more information on price elasticity (of products/services) and corresponding price sensitivity (of customers). Setting the appropriate price for your product or service is often hard. Price setting has a direct impact on the company's bottom line and is one of the toughest things a marketer must do. While pricing, a marketer must understand the concept of PRICE ELASTICITY. By definition, price elasticity of demand is the percentage change in the quantity demanded as a result of the percentage change in price. The higher the absolute value, the more sensitive customers will be to price changes. But there are more factors which influence price elasticity of demand, including the availability of substitute products, the expenditure involved, time, product durability, and the range of applications. FORMULA FOR PRICE ELASTICITY OF DEMAND The simple formula for price elasticity of demand (PED) is: PED = Percentage change in quantity demanded / Percentage change in price For example, if a 10% increase in the product price leads to a decrease of sold items of 20%, then we can say PED = 0,20 / 0,10 = 2. Marketers must understand how elastic, sensitive to changes in price (or inelastic, ambivalent), their (users of) their products are when setting prices for these products, because they usually have a harsh response to price change when they are considered non-essential or have multiple substitutes in the market. We can distinguish several zones of elasticity in which products and services fall; the precise number of them is less important than understanding which zone your product falls under and what happens to the customer demand when the price is changed. Gallo mentions following 5 price elasticity zones of Jill Avery: PERFECTLY ELASTIC: Here a very small change in the price will result in a very large change in the quantity demanded. Products in this zone have no brand, no product differentiation and the customer does not have any meaning attached to the product. RELATIVELY ELASTIC: A small change in price causes a large change in the quantity demanded (PED is greater than 1). For example, an increase in the Beef price will result in a decrease in demand if there are immediate substitutes available like Chicken and Pork. UNIT ELASTIC: A change in price causes an equivalent change in the demand (PED is equal to 1) RELATIVELY INELASTIC: Large changes in price cause a small change in demand (PED is less than 1). For example: Gasoline. As this is an essential commodity and people own some type of car that can only use it, most people need it. Thus even when its price increases, the demand doesn't change substantially. Similarly, all products having a strong brand are inelastic to some extent. That's why brand equity is often a good investment. PERFECTLY INELASTIC: Here the quantity demanded does not change with a change in price at all. Products in this category are an absolute need, and there is no other option available to obtain them. This scenario is often observed when an organization has a monopoly. That means even if the organization changes its prices, the customers will still have to buy from it. How can marketers use the above price elasticity zones? When some product is highly elastic, it is perceived as replaceable by the customers. A marketer's goal must be to move their product from being relatively elastic to relatively inelastic. The product must have/create meaning, value, or differentiation for the customer. Thus, the marketer should employ various branding and marketing initiatives to increase the customer's desire or willingness to pay regardless of the price. The above is a very important, dynamic marketing metric to watch for. Remember that a competitor might offer a compelling substitute, pushing your product into a more elastic zone in the eyes of the consumers. Again, price elasticity gets affected by many factors, like the type of product, the income of the target market, the economy, and the competitive environment. Sources: F. Gadi et al., (2005), "The Dynamics of Price Elasticity of Demand in the Presence of Reference Price Effects," Journal of the Academy of Marketing Science, Volume 33, No. 1, pages 66-78 Amy Gallo, (2015), "A Refresher on Price Elasticity", Harvard Business Review.

		1 Priyanka B Manager, India
	Calculating and Utilizing Price Elasticity Indeed, understanding the concept of pricing elasticity is critical for firms seeking to optimize profits. Price elasticity, in a nutshell, is a measure of how demand for a product or service changes ...