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I had this burning desire to upgrade my entertainment game some time ago and decided to buy a new TV. So, with my detective skills, I Googled a dozen stores in my city that had my dream TV in stock. After a 30-minute price comparison, I picked the one with the cheapest tag and hit the road.
On my way there, I realized I also needed an HDMI cable, an extension cord, and some batteries for my alarm clock, which had been showing 9:30 for two weeks straight.
Shopping summary? I bought the TV below the market price, about 3 to 5% cheaper than the average. And the cable, extension cord, and batteries... How much did I actually pay for them? How much do they even cost? I probably spent twice as much as their average price.
Moral of the story? Price sensitivity is lowkey king in e-commerce and retail. Let's explore it.
Price sensitivity is like a mood ring for the wallet – it tells you how much you care about the price of a product. Think of it this way: if the price of your favorite soy milk went up by 10%, would you still buy it? Or would you start hunting for cheaper options, like it's a treasure hunt, and switch to a more affordable alternative or buy it somewhere else?
Now, the price sensitivity level depends on many factors, like how often you buy the product, how many alternatives are available, or how easy they are to find and compare. Interestingly, depending on the purchasing context, the same product can have high or low price sensitivity.
Take my TV shopping spree for instance. I was super sensitive to the price of the TV itself and spent some time searching for the best deal. But when it came to buying the cable and battery, I was like, "Just give me what you have."
However, if the HDMI cable had been my primary purchase, I would have spent some time looking for a decent deal. The same product would become more price sensitive for me in a different context.
On a side note: price sensitivity is a metric used in retail and B2C e-commerce because you need a big pool of data on similar or identical products to make accurate comparisons. The equivalent of price sensitivity in B2B is WTP (Willingness to Pay).
Every e-commerce manager strives (or rather should strive) to boost conversion rates while still keeping margins intact. But let's face it, it's a tricky one. More often than not, you gain one while losing the other.
For instance, if you want to boost your conversion rates, you might spend big bucks on UX optimization or paid ads. As a result, you do get more conversions, but because all that spending increased your customer acquisition costs (CAC), you ended up torpedoing your margins.
But it doesn't have to be this way. With the awareness of your products' price sensitivity, you can increase conversions without sacrificing your margins. That's right, you can have your cake and eat it too!
Competitively priced products will make fewer people rebound from your store because of the price (just like the price of the TV has attracted me to this particular store). At the same time, your overall revenue will increase because you will earn extra on low-sensitivity products, like the HDMI cable, extension cord, and batteries.
Now picture this: a laptop supplier decides to jack up the price of a specific model. The e-commerce manager, trying to maintain profitability, increases the selling price. But then, the marketer slashes the price to maintain conversion rates of the promo campaign.
It's a never-ending game of peek-a-boo that kills margins and results in unprofitable (or barely profitable) promotions and wasted business potential.
The solution? Understanding the price sensitivity of your key products. Without it, you're left with...
Plus, you won't be able to keep up with the competition's price movements. Ultimately, you want to be the cheapest for high-price-sensitive products, cost-optimal for medium sensitivity, and expensive for low-sensitivity items (I'm looking at you, soy sauce).
Now let's look at the 3 price sensitivity groups that products fall into. Remember, however, that as in the example from the beginning, the same product can be high, medium, or low price sensitive. It all depends on the purchasing context.
Here's another real-life example: OTC drugs, like vitamin C or dietary supplements, are usually price-sensitive. But when you have a toothache, your price sensitivity for painkillers drops faster than a hot potato – you'll grab whatever gets the job done, no matter the cost.
But let's focus on some classic examples to grasp the principle of price sensitivity.
This group includes items with highly transparent and easily comparable prices. Groceries, clothing, and household goods are great examples.
These are typically items that must be purchased regularly, so shoppers tend to be more aware of price changes in these categories. They may opt for generic or store-brand versions of these items if they feel they can get the same benefits at a lower cost.
Despite their relatively high price, travel services are good examples too because, again, they're easily comparable. Shoppers often compare flights, hotels, rental cars, and other travel services to find the best deals.
(This mechanism is so simple that it's beautiful).
These are items that shoppers occasionally compare prices for, but the price point is typically not the primary consideration when buying them.
Examples of mid-level sensitivity products would be furniture and appliances, as they are usually large enough purchases that customers may take their time when comparing prices, but they may also be willing to pay a slightly higher price if certain features or quality requirements are met.
Mid-level price sensitivity can also apply to everyday items like bio food. Many shoppers may be willing to pay extra for organic products even though cheaper alternatives are available. Still, if the price of bio tomatoes doubles, many will go for the more affordable, regular stuff.
We tend to be less or not concerned about those items' prices. Typical examples are luxury goods, collectibles, and art. These kinds of products have high markups due to their perceived value and the simple fact that they're not to be found in the same abundance as everyday items (making them harder to compare prices on or find discounts for).
On the flip side, these products allow e-commerce stores to recoup the margins they cut (but not too much!) on highly price-sensitive products. Think again how simple and beautiful this mechanism is: you attract customers and visitors with one product on which you earn a little less. Then, you reflect the profit on other complementary (or independent) products.
Two birds with one stone!
Big e-commerce players, whose traffic is counted in hundreds of thousands of customers, have it easier. They can crunch numbers with high-tech tools to understand supply and demand and monitor their competitors' moves.
But for the smaller guys, analyzing external and internal data is the secret sauce to determine their price sensitivity and keep their customers clicking and buying.
Example questions:
With that knowledge, you'll profitably attract people to your store who come for the best deal on one product but leave with a basket full of other things that will earn you the most percentage.
Win-win!
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Certified expert in price, revenue and margin management in B2B companies and e-commerce. Member of the prestigious Professional Pricing Society. At Valueships, he is responsible for the implementation of consulting projects and taking care of the profitability of clients. Prior to joining Valueships, he worked at McKinsey & Company in the area of pricing and strategy.
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Certified expert in price, revenue and margin management in B2B companies and e-commerce. Member of the prestigious Professional Pricing Society. At Valueships, he is responsible for the implementation of consulting projects and taking care of the profitability of clients. Prior to joining Valueships, he worked at McKinsey & Company in the area of pricing and strategy.
