Price Sensitivity

Published Oct 25, 2023

Definition of Price Sensitivity

Price sensitivity, also known as price elasticity of demand, refers to the degree to which the demand for a product or service changes in response to a change in its price. In other words, it measures how sensitive consumers are to price changes.

Example

Let’s consider the market for coffee. If the price of a cup of coffee increases, some consumers may choose to switch to a cheaper alternative, such as tea or a homemade beverage. On the other hand, there may be consumers who are loyal coffee drinkers and would be willing to pay a higher price for their preferred drink.

Now, imagine that the price of coffee decreases. This may entice more consumers to buy coffee, especially those who were previously deterred by the higher price. However, there may also be consumers who perceive a low price as an indicator of poor quality or may simply not have a strong preference for coffee.

These examples illustrate different levels of price sensitivity among consumers. Some consumers are highly price-sensitive and will adjust their purchasing decisions based on price changes, while others are less sensitive and are willing to pay a higher price.

Why Price Sensitivity Matters

Understanding price sensitivity is crucial for businesses when determining pricing strategies. By knowing how price changes affect demand, businesses can make informed decisions about pricing levels, promotions, and discounts. Price sensitivity also provides insights into consumer behavior and preferences, helping businesses tailor their marketing efforts and appeal to their target audience. Additionally, price sensitivity affects competition within a market, as companies may adjust prices to attract or retain customers.