Understanding Price Sensitivity in Marketing

Price Sensitivity is the awareness of the consumer to what they perceive to be the window of cost within which they will buy a particular product or service. It is imperative that the marketing professional be able to assess price sensitivity in the target market accurately as missing the “window”, even by a small margin can have enormous consequences for the company’s bottom line. Priceline companies have use their format to mine the price expectations and tolerances of their customers so the offerings they make can be as near the customer’s expectations of discount deals as possible and still maintain viability.

Each customer will have a certain price acceptability window and different customers have different limits in their perceptions of what price is within their range. R.S. Consulting notes that establishing bottom line customer perceptions of price and their responses to price indicates whether a market is very price sensitive or not. For the marketing professional the trick is to figure out how customers determine what “price” means. R.S. Consulting uses a modified version of a method known as Price Sensitivity Measurement. This method asks survey respondents to define a possible range of prices noted in a scale called a price ladder. In order for the survey to be valid and not become a self fulfilling prophecy, the prices represented must be positioned on the upper or lower ends of the scale and not in the middle. Survey respondents are ask to pick two different price points on the price scale: The point where the product is beginning to appear “expensive” or a poor value for the money, and the point where they perceive the product to be a “good buy”. (Information retrieved 12/2/04 from http://www.rsconsulting.com/white-papers/price-sensitivity-measurement.asp ).

Priceline.com is a nearly perfect place to study the meaning and effect of price sensitivity because they base their business on a transparent use of the concept. Priceline customers are very price sensitive. The model of price sensitivity measurement used by Peter van Westendorp to determine the price sensitivity of a product works very well for Priceline. These customers know what they expect a provider to charge for these services and what they consider to be a “good buy” price. Draeger, 2003, refers to the van Westendorp model as a “simple straightforward approach” to understanding the price sensitivity of a product. First ask, “What would you expect the price to be for this product or service?”, and second, ask “what would you expect to be a “good buy” price?”. The customer’s stated Good Buy price is subtracted from the price they would expect the vendor to ask for the product or service to determine what will be perceived as a good discount price. Priceline customers look not just at the prices for, say airfare, but at quality as well. When a price they can obtain is bottom of the bucket pricing they look at quality. If the layover times are long, the times of departure very inconvenient, and the number of transfers too high, the quality is perceived as too low to make the price worth the extra monetary savings.

The effect of Priceline prices on the reference prices customers have in mind when they shop for travel and mortgage services is to lower the median price so that the answers to both the “what do you expect the asking price to be” and the “what do you consider a Ã?¯Ã?¿Ã?½discount’ price” answers are lower. Kotler, 2003, points out that customers are more price sensitive to more expensive products and services or to products and services they use more often. Because travel is a high cost item customers can be expected to be very price sensitive and quality conscious as well. Customers who visit a Priceline site can easily compare prices, the quality of substitutes (how many transfers, schedule times, layover time), and the total cost of the end product (whether there will be extra hotel and meal costs if layovers are over lengthy time periods).

Priceline mortgage and loan promises of lowest cost loan guarantee effects customer’s perceptions of the product’s value in a positive way because people are very sensitive to interest rates. Mortgages and home equity loans are considered to be very big ticket expenditures so the promise of savings is a significant factor in attracting interest. I found two sites with actual customer responses and noted that satisfaction with the service varies. On the Complaints.com site a customer identified only as Kelly Y complained that Priceline Mortgage actually posts more fees than they advertise. By the time a customer is aware of the hidden fees they have already paid a non-refundable appraisal fee. Kelly Y also notes that they delayed the processing of the loan so a late penalty was charged for the application term expiring. The E-pinions.com site had a review by member Michael Risch that noted the low rates as a positive factor but went on to point out slow, dispersed service, and very different results depending on the broker who is servicing your request. Risch was enthusiastic about the interest rates which at the time he applied were a half percent below any other r4ates he looked at; however, he noted that since then the rates have been “competitive” but not as low as they were. The lowest cost loan guarantee may pique interest and suggest valuable savings but the follow up needs to have the same quality of openness and fairness that talking with your local banker would have or the word of mouth complaints will tarnish the image. Risch listed some cautions in his review but ended up by saying he would recommend the service.

A market professional must know a range of price sensitivities and the demand curve will reveal the most likely quantities a marketer can move at alternative prices. Kotler notes that the demand curve is the sum of many individual reactions to offerings and reflects many different price sensitivities. The Priceline.com format capitalizes on this range of tolerances to sell its services. Product distinctiveness, quality, and prestige as well as the customer’s awareness of substitutes, total income, and anticipated level of satisfaction can move the acceptable cost window up or down the price scale.

References:

Kelly,Y., 2004, retrieved 12/3/04 from http://www.complaints.com/directory/2004/may/13/21.htm

Kotler,P., 2003, Marketing Management, Prentice Hall, Upper Saddle River, New Jersey 07458

Priceline.com

Risch,M., Epinions.com, retrieved 12/4/04 from http://www.epinions.com/content_65249250948

R.S.Consulting, retrieved 12/3/ 04 from http://www.rsconsulting.com/white-papers/price-sensitivity-measurement.asp

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