How to do price sensitivity analysis
Notion of Price Sensitivity
Price sensitivity (PS) is a measure of customers’ reaction to the price level offered (satisfaction or displeasure, etc.) and their willingness to make a purchase.
When setting a new product cost or changing the cost of an existing one, it is important to predict correctly the more likely consumers reaction.
PS is determined by the following factors:
- customers’ perceptions of alternative goods or services;
- uniqueness of the product/ service to buy;
- goods contrastive analysis to find out whether the purchase of a similar product will be more beneficial;
- product or service quality assessment in terms of its cost (price-quality relationship);
- efforts necessary to make a comparative study.
Price Sensitivity Case: Research and Analysis
Active pricing requires that product value formation should start with analyzing consumer needs and determining their PS. Such approach will enable an enterprise to find out how price changes influence sales and, in turn, to conduct a more thorough investigation of causal relationship between product’s value, its cost and profit achieved.
The key to success in determining PS lies in a deep understanding of a target group and target market of your marketing offer. Your every potential buyer will perceive product’s value in different ways, which means that each consumer group will have different PS. To note, arithmetical mean value does not work in this case at all.
There are several methods for getting to know PS level of target audience. They differ in terms of measurement process (controlled and uncontrolled), as well as measurement object (actually made purchases or consumer preferences).
The most common methods for researching client preferences and intentions are direct surveys and reviews of visitors’ feedback and responses. The reason for that is as simple as ABC: this type of study turns out to be both cheaper and easier than possible alternatives. Besides, the results can be achieved at different stages of product production or sale of goods on the market.
Another option involves a series of questions (PSM) to get an understanding of PS level. In simple words, a consumer has to answer 4 questions regarding a particular product or service price level:
- Which product price would you find satisfactory and worth spending?
- Which product price would you consider expensive, but would still make a purchase?
- Which price would make you refuse to make a purchase because you find the goods suspiciously cheap?
- Which price would make you refuse to make a purchase because you consider the goods too expensive?
After analyzing the answers, you can build a curve of likely purchases, showing the dependence of goods quantity on estimated cost level. This method gives better results, most likely due to the fact that a buyer associates this situation with a real purchase. It allows not only measuring reasonable prices range for a new product, but also the upper and lower price limits, as well as identifying changes in PS in different regions and at several time periods.
Wrap It Up
The mentioned methods are just the smallest part of solutions range to cope with the request “how to do price sensitivity analysis”. Each case is unique, and if you are not sure which technique of measuring and investigating price sensitivity to choose, we are always there to help you. Contact us, and skilled Scheduling Worldwide marketing specialists will provide you with direct and detailed instructions on how to achieve reliable and accurate data. Just follow the link for more information!
