Price Sensitivity

Definition

Price sensitivity refers to the degree to which a consumer's demand for a product or service is affected by changes in its price. It measures how responsive consumers are to price fluctuations and how their purchasing decisions are influenced by the cost of the offering. This concept is crucial in understanding pricing strategies and its role within the marketing mix.

5 Must Know Facts For Your Next Test

1. Price sensitivity is a key consideration in the pricing and its role within the marketing mix, as it determines how changes in price will impact demand and revenue.
2. The five critical Cs of pricing - Costs, Customers, Competitors, Company, and Collaborators - all play a role in understanding and managing price sensitivity.
3. The five-step procedure for establishing pricing policy, including setting objectives, determining demand, estimating costs, analyzing competitors' prices, and selecting the final price, must account for price sensitivity.
4. Pricing strategies for new products, such as penetration pricing and skimming pricing, are heavily influenced by the target market's price sensitivity.
5. Understanding price sensitivity allows companies to optimize pricing to balance profitability and customer demand, which is crucial for the success of any product or service.

Review Questions

• Explain how price sensitivity relates to the role of pricing within the marketing mix.
  • Price sensitivity is a critical factor in the pricing component of the marketing mix. It determines how changes in price will impact demand and, ultimately, revenue. Marketers must carefully consider price sensitivity when setting prices, as it influences customer purchasing decisions and the overall effectiveness of the marketing strategy. Understanding price sensitivity allows companies to optimize pricing to balance profitability and customer demand, which is crucial for the success of any product or service.
• Describe how the five critical Cs of pricing (Costs, Customers, Competitors, Company, and Collaborators) influence price sensitivity.
  • The five critical Cs of pricing all play a role in understanding and managing price sensitivity. Costs directly impact the minimum price a company can charge, while customers' perceived value and willingness to pay determine their price sensitivity. Competitors' pricing strategies and the company's overall objectives and positioning also influence how price-sensitive the target market is. Additionally, collaborators, such as distribution channels and suppliers, can affect the final price and, consequently, price sensitivity.
• Evaluate how price sensitivity should be considered when establishing pricing policy and developing pricing strategies for new products.
  • When establishing pricing policy, the five-step procedure must account for price sensitivity. This includes setting objectives, determining demand, estimating costs, analyzing competitors' prices, and selecting the final price. Price sensitivity is a key factor in this process, as it directly impacts demand and the optimal pricing strategy. For new products, pricing strategies like penetration pricing and skimming pricing are heavily influenced by the target market's price sensitivity. Marketers must carefully assess price sensitivity to determine the most effective pricing approach that balances profitability and customer demand, ensuring the success of the new product.

Related terms

Elasticity of Demand: Elasticity of demand measures the responsiveness of demand to changes in price. It is closely related to price sensitivity, as it quantifies how much demand changes when price changes.

Perceived Value:

Perceived value is the customer's assessment of the worth of a product or service, which influences their price sensitivity. Customers with a higher perceived value are generally less price sensitive.

Reference Pricing:

Reference pricing is the process of consumers using comparisons to other prices as a benchmark when evaluating the fairness and appropriateness of a product's price, which can impact price sensitivity.