Consumers’ knowledge of prices of products is usually sketchy particularly for low cost items. And their behaviour is often inconsistent with their claims. For instance, according to claims, they would be more price elastic towards an impending price increase than reflected in their behaviour at the time the price increase takes place.
Understandably consumers are much more sensitive to a discounted price promotion (i.e. a temporary price reduction) than a regular price reduction. The discount elasticity of demand (i.e. promotional price elasticity) is a lot greater than the price elasticity of demand — and marketers should be careful not to confuse one with the other.
The availability of similar, substitutable products increases consumers’ sensitivity to price. On the other hand a well differentiated, unique product is less elastic to price changes.
Products that are deemed necessary tend to be less sensitive whereas inessential products may be more elastic. Also, low-cost products that take up a smaller proportion of the consumers’ budget are less elastic compared to those that take up a greater share of the budget.
Consumers’ price elasticity is also observed to diminish when shopping with a friend, or when being persuaded by a salesman perceived as an expert.
Easy access to information about price and product features also increases consumers’ sensitivity to price. As consumers increasingly make web-based price comparisons at home and on the go, they are becoming more sensitive to prices.
It is believed that price points may also affect the price elasticity of demand. For instance a reduction in price from $10.00 to $9.99 is noted to have greater impact than a reduction from $9.99 to $9.98. This incidentally has led to the practice that is referred to as “odd pricing”, where retailers set prices ending with “.9”.
The cost of many ingredients and raw materials has fluctuated widely over the years, partly because of large increases in demand from big markets like China. Take for instance the global milk trade price index, which soared from 693 in June 2006 to 1,691 in October 2007. Manufacturers usually protect themselves from these types of fluctuations by entering into long term contractual agreements with suppliers. Yet when contracts are re-negotiated, they are often compelled to pass the sharp increase in price of their ingredients onto consumers.
In such situations, where manufacturers are compelled to pass a large increase in price to consumers, they often do so in part by reducing the pack size. For instance when milk prices soared in 2007, and powdered milk manufacturers were obliged to increase prices per kg by as much 30% to 40%, many of them imparted a proportion of the price adjustment by reducing pack sizes (e.g. from a 1 kg pack to 900 gm pack). This helps cushion the impact — studies have shown that consumers are less sensitive to a reduction in volume than they are to an increase in price.
Studies have also shown that consumers’ sensitivity to an increase in price is different from their sensitivity to a reduction in price.
These examples illustrate a diversity of factors affecting consumers’ sensitivity to price, that further complicate the task of setting price.
With view to the uncertainties clouding pricing decisions, marketers should rely on research studies that reveal how price affects the demand for their brands and their competitors’ brands.