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9 Price Sensitivity Drivers

9 Price Sensitivity Drivers

We must examine the price sensitivity of your services and solutions in specific market segments when developing the proper revenue and pricing models.

Thomas Nagle and Reed Holden describe nine price sensitivity drivers or factors that influence how a customer perceives a particular price and how price-sensitive they are likely to be in their purchasing decisions.

Their book is titled  The Strategy and Tactics of Pricing: A guide to growing more profitably (Amazon) .


These are the driving forces:

Reference price effect 
Buyers' price sensitivity for a particular product or service grows when the price rises compared to perceived alternatives. Perceived options can differ depending on the customer category, the occasion, and other circumstances.

Difficult comparison effect
Buyers are less price sensitive when comparing a known or more reputable product or service to potential alternatives. 

Switching costs effect
The more the product- or service-specific expenditure required for a buyer to switch providers, the less price-sensitive the customer is when comparing alternatives.

Price-quality effect
Buyers become less price sensitive as higher costs communicate higher quality. Image products or services, exclusive products or services, and products or services with few quality indications are examples of products or services that benefit from this impact.

Expenditure effect
Buyers are more price sensitive when an expense consumes a significant portion of their available money or budget. 

End-benefit effect
The effect, separated into two halves, refers to a specific purchase's relationship to a more considerable overall benefit.

  • Derived demand:
    As purchasers become more sensitive to the price of the end benefit, they become more sensitive to the pricing of the things that contribute to that benefit.
  • Price proportion cost:
    This is the percentage of the overall cost of the end benefit accounted for by a specific product or service that aids in achieving the end benefit. The lesser the provided products or service's percentage of the total cost is, the less price-sensitive purchasers will be.

Shared-cost effect
The less price-sensitive buyers are, the smaller the share of the purchase price they must pay themselves.

Fairness effect
Buyers are more sensitive to a product or service's price when it falls outside what they consider "fair" or "reasonable" given the purchase context.

The framing effect
Buyers are more price sensitive when the price is perceived as a loss rather than a foregone benefit, and they are much more price sensitive when the price is paid separately rather than as part of a package.


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