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Understanding Price Sensitivity with Competitive Pricing Analysis

Table of content

    Introduction

    When running a business, understanding pricing sensitivity is important. You have to optimize your pricing strategy and increase profits. Price sensitivity research can help businesses make better decisions about how to price their products and services. It allows them to be more competitive and raise their revenue. Let’s take a look at how to conduct competitive pricing analysis on price-sensitive customers, what price sensitivity is, and methods to measure price sensitivity.

    What Is Price Sensitivity?

    Pricing sensitivity is how the price of a product influences customers’ purchase decisions. It is also known as price elasticity. In general, it refers to how demand shifts when product prices change. Price sensitivity is often measured by the price elasticity of demand, which means measuring how demand for a product changes when the price changes. Price sensitivity varies by customer; for example, some consumers are willing to pay more when the price of a product rises, while others are not.

    How to Conduct Competitive Pricing Analysis on Price-Sensitive Customers?

    Before launching any product, conducting a price analysis is important for selling the product successfully in the market. You have to analyze your competitor’s pricing. You can analyze competition prices manually or using pricing software. Here is how you can conduct a pricing analysis: 

    Identify Your Competitors

    Unless you’re just starting your business, you probably already know who your competitors are. Use Google to search for similar products or services and see who appears at the top of the search results. Check out their products or services to see if they are direct competitors. You can also check their geographic location, their products and services, price points, and how and where their products are distributed. For example, if they only sell online or in a specific state, and you provide multi-channel retail in many states, then they are not your direct competition. Here, identifying competitors means competing with the one who has the same potential customers, products, and services as you.

    Classify Direct Competition and Indirect Competitors

    It is necessary to evaluate your direct and indirect competition. Direct competitors means they sell the same products with similar prices, locations, and customers. Indirect competitors may not appear to be competitors at first, but upon closer study, they compete for some of the same customers as you. To find these indirect competitors, use the same search strategies that your competitors use. Classifying this can help you identify gaps in your pricing and value proposition.

    Compare the Value Propositions

    Now that you’ve found your direct and indirect competitors, it’s time to look at what they offer. This will give you an idea of where you stand in the competition and what prices you are competing with. Before setting a price, you should consider something like:

    • The quality and characteristics of your competitor’s products or services
    • How are they branded, packaged, and presented?
    • Customer feedback and opinions 
    • Marketing materials and keyword rankings on Google.

    After checking these things, you can compare your product or service with those of your competitors and check whether you can compete with them or need to optimize your strategy. 

    Analyze Competitor Prices

    You can analyze prices manually or in the software. But if you do this manually, you’ll need to build a spreadsheet with a list of each competitor’s products and their prices. If you use software, you can search, filter, and export competitor pricing data for analysis. After analyzing your competitors’ current rates, you can make your own pricing decisions. You should look at the big picture and analyze each competitor’s pricing strategy. 

    What Are the Methods to Measure Price Sensitivity?

    These methods are for understanding your targeted customers and those who buy. Each method will evaluate your product’s value differently, resulting in varying price sensitivity. As a result, you should assess the price sensitivity of each market segment independently to ensure that the data you acquire is representative. Check out some methods for measuring price sensitivity:

    Van Westendorp Price Sensitivity Method

    The Van Westendorp Price Sensitivity Meter is a popular and successful tool for conducting pricing research. Peter Van Westendorp created his price sensitivity meter (PSM) in 1976. It consists of four questions to determine whether the product is:

    • Too cheap.
    • Too expensive.
    • Cheap and good value.
    • Expensive and high-side

    These surveys provide an ideal suggested price point and a range of too-low and too-expensive options.

    Gabor-Granger Method

    This method was developed by Andre Gabor and Clive Granger in the 1960s. Gabor-Granger is another pricing method that resembles the Van Westendorp investigation. Customers are presented with a description of the product and a starting price. If the respondent says yes, the price rises to a new level until they say no. This method has a linear approach to determine the maximum pricing point. 

    Price Ladder Method

    The price ladder method means asking your customers about their willingness to purchase a specific product at a specific price, which is typically ranked on a scale of 1 to 10. If the customer’s intention to buy an answer falls below a certain amount (typically 8), the price is low, and they are asked if they plan to buy again.

    Buyer Intelligence Surveys

    Knowing what is important to your customers means understanding what they are thinking when they buy your product or service. Buyer intelligence surveys help you identify their complaints and how your product will solve them. You can gather useful information to improve your marketing and determine whether your product matches the quality of price-sensitive buyers.

    Monitor Online Reviews

    Reviews are an excellent method of getting customers’ opinions on your product pricing. Whether you’re looking at reviews for your product or those of competitors, it can help you to set the pricing and understand the mindset of your customers. When you compare your product to your competitors, you gain valuable insight and advice on how to differentiate it.

    Listen to Sales Calls

    If your company makes a lot of sales calls, listening to them on occasion might be really beneficial. Sales calls can give you valuable information about your buyer’s habits and whether they are price-conscious or value-conscious. This method allows you to understand your price-sensitive customers better. When you apply this method on a regular basis, it can provide you with market trends as well as data on competition and pricing. 

    Conclusion 

    Businesses should understand price sensitivity with competitor analysis to make correct pricing decisions, understand price-sensitive customers, and maximize sales and profits. It helps in product development, targeting customers, setting prices, and customer-friendly promotions. The price sensitivity method can also help companies to explain prices and justify their value propositions. You can also calculate price sensitivity. To calculate price sensitivity, just divide the percentage change in quantity needed by the percentage change in price.

    Price sensitivity = % change in quantity / % change in price

    For e.g., If you sell food and raise the price by 50%, sales will fall by 16%. Using this formula, you can determine the price sensitivity of food.

    Price Sensitivity: (-16% / 50%) = -0.32.

    This means sales are down 0.32%.

    You can use Pricing Research Software to conduct a pricing sensitivity test. It can provide you with the data you need to make smarter marketing decisions for your product or service.

    Prashasti

    Prashasti

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