It is extremely important to be able to estimate the impact of price changes on sales and profits. That is, it is important to know how a price change will impact consumer response, competitive response, and unit volume. Many businesspeople erroneously believe that a price increase is the most cost-effective revenue-generating marketing tactic. I have heard generally intelligent professionals share their excitement about how a price increase will drop to the “bottom line” dollar-for-dollar. Most of the time, this is simply not true.
People display different price sensitivities to different products in different situations. Often people are relatively price insensitive, but only within a relevant price range. Once a price exceeds that range, people become very sensitive. Raising the price across that threshold is akin to walking off a cliff.
Factors That Decrease Price Sensitivity
- Relevant brand/product differentiation.
- Marketing and selling on factors other than price.
- Convincing consumers that quality differs significantly among products and brands in the category.
- Self-expressive or “image” products or brands. (For example, if I wear sports apparel featuring Nike’s swoosh logo, it implies I have the “Just do it” attitude of Nike’s “authentic athletic performance” essence. If I carry a Gucci handbag or wear a Rolex watch or drive a Mercedes-Benz, it says I have social status. If I wear a Harvard ball cap, it says I am extremely smart and successful; and if I wear a Harley-Davidson tattoo, it says that I know the freedom of the road, that I am a free spirit.)
- Brand advertising.
- Situations in which price is a signal to quality—usually for relatively new or unknown products or brands.
- When it is difficult to ascertain a “reference price” within the category.
- When there are significant switching costs—in dollars, time, effort, risk, or emotional impact.
- Product categories for which the risk of failure is an important issue.
- When the price is insignificant relative to the total budget or discretionary income.
- When the item does not significantly contribute to the cost of the products and services that a business sells.
- When the price falls within the expected price range for products in the category.
- When offering “value-added services” vs. “price discounts” to motivate purchases.
- New markets.
Factors That Increase Price Sensitivity
- Price promotions, especially when people are able to stock up on the price-discounted items
- Mature and declining markets