Pricing is one of the most critical aspects of any business. Having an in-depth understanding of pricing is, thus, a great plus to any business person. One of the essential measurements used to understand pricing is price sensitivity analysis. This measurement shows how an alteration of price affects demand and supply. It is a crucial determinant in developing pricing strategies. It can also help one access the value you add to products by gauging clients’ will to pay.
Several factors influence price sensitivity. Price anchoring tops the list of these factors; this factor implies that the initial cost very much ties customers. The first price is always the reference for customers when making buy decisions. For instance, take a tech company that sells its tech product at $50. After some years, the tech company launches a new version of the tech product at $55. Customers will get so interested in the product because the new price is close to the anchor price. Another critical factor that affects price sensitivity analysis is the switching costs. Switching costs are expenses incurred because of buying a different product. The switching cost must not be financial.
The energy spent while making the change, the emotional stress, and the time spent are all deemed switching costs. High switching costs deter clients from changing their buy decisions. The competition also has a significant influence on price sensitivity analysis. If customers think that they can substitute your product for another and still derive the same value, they will not hesitate to change their buy decision. Finally, consumer income also has its place in the price sensitivity analysis. Products whose target customers are low-income persons exhibit high price sensitivity.
The benefits of price sensitivity analysis come true when price sensitivity is measured the right way. Measuring price sensitivity analysis requires an understanding of the target market. Knowing the buyer personas is also a big plus. Consider breaking down the target market into segments. A low price in one market segment may be a high price in another one. There are two widely accepted methods used for measuring price sensitivity. These methods are price laddering and Van Westendorp Price Sensitivity Meter. Using these strategies, investors can always rest assured of minimal price risk involved.