Price Sensitivity in Professional Marketing - Research Paper Example

Situational price sensitivity in Marketing 1. Introduction Price sensitivity is the consciousness of the consumer to what they identify to be the porthole of cost within they will buy a particular product or service. Price sensitivity is term for a range of research methodologies used to help recognizing definite price points potential customers would be willing to pay for a particular product or service. The modes used are quantitative in nature allowing for protrusions to be made about the probability of a product's achievement.  This information, combined with forecasting tools, can make available influential insight into what a company is facing as it estimates a variety of pricing options. 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. 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. 2. Problem Statement Pricing is an extremely important part of the marketing mix that has been neglected for a long time. It is the only marketing strategy variable that generates a positive cash flow. The remaining variables (Advertising and promotion, product development, selling effort, distribution, packaging) all create costs. To optimize pricing and all related marketing mix instruments, price sensitivity is an essential contract. Sensitivity is defined as "the response of an organ or organism to external stimuli" (Webster's Third New International Dictionary 1993). Price Sensitivity is used by organizations that are working with unknown pricing situations, new products, products that offer thin margins or products that offer improved benefits to established products. Put together, the term price sensitivity clearly refers to the response of an individual to the amount of money asked or paid for a good or service. This commonsense definition is generally agreed upon (e.g., Hoch et al. 1995; Tellis 1988). It indicates what effect a price change will have on the buyer's intention to purchase a given product or class of products. If buyers are considered price sensitive, changes in price will cause (definite) changes in their buyer behavior. If they are not price sensitive at all, price changes will not result in a change in their purchasing behaviour. In this study, price is assumed to have a negative effect on the purchase probability. A higher price will normally lead to lower demand.(1) Price is hence a negative attribute of an electronic entertainment product. Price sensitivity is defined as the degree to which consumers use price as a decision-making criterion (Lichtenstein, Bloch, and Black 1988). However, its analysis has been mostly focused on traditional consumer goods like groceries or apparel, which have different characteristics in production and consumption than electronic entertainment or media products. In order to assesses what actions have to be taken by media companies to react to price sensitive consumers, the price sensitivity construct and its determinants and consequences have to be scrutinized. There have been many prior studies of how advertising affects two equilibrium quantities: the price elasticity of demand and/or the price level. Our work is differentiated from previous work primarily by our focus on how advertising shifts demand curves as a whole. As Becker and Murphy pointed out, a focus on equilibrium prices or elasticities alone can be quite misleading. Indeed, in many instances, the observation that advertising causes prices to fall and/or demand elasticities to increase, has misled authors into concluding that consumer “price sensitivity” must have increased, meaning the number of consumers’ willing to pay any particular price for a brand was reduced – perhaps because advertising makes consumers more aware of substitutes. But, in fact, a decrease in the equilibrium price is perfectly consistent with a scenario where advertising actually raises each individual consumer’s willingness to pay for a brand. Price-sensitive customers control repeatedly, pursuing the lowest price. But when they arrive at the best priced supplier, they are unlikely to leave, even if they claim that they will do - they may be unimpressed by the quality of customer service, but they are motivated by price, and until they find better prices elsewhere, they will stay. 3. Objectives of this Study Objectives of this work are to explain price sensitivity of retail market and its consequences for the industry. The analysis of price sensitivity in a complex psychological model reveals some mechanisms at work that are able to explain what factors influence price sensitivity, what its consequences are and how price sensitivity is reinforced. The following research questions need to be answered: (a) What are the determinants of price sensitivity? (b) What are its cognitive and behavioral consequences? (c) What are the managerial implications of price sensitivity? Hence 1. The price sensitivity construct has to be explained; 2. Hypotheses that relate determinants and consequences to be price sensitivity are introduced. 3. A comprehensive model of price sensitivity is presented. 4. A survey for testing the model is developed and conducted; 5. The scales used for measurement in the survey are examined in terms of reliability and validity; 6. The empirical findings are used to test and evaluate the model; 7. Managerial implications are drawn in the study. In contrast to economics, price sensitivity is modeled as an endogenous variable in this study and not just as a part of black-box model. Methodology, Scope and Limitation of the Study A random utility theory stated preference model is used to estimate the joint impact on price sensitivity of differences in systematic utility between retail markets and products and differences in the consistency with which consumer respond to price. Implications of the proposed model are formulated. They indicate that as the systematic utility of a retail product increases and/or its price decreases (all else being equal), price sensitivity decreases. Three hypotheses of retail price sensitivity also are investigated by using survey data on consumers' stated preferences. As expected, the results show that there is a systematic effect of income on price sensitivity, with high income retail markets being less price sensitive than original products (Dellaert, 2003). It is important to point out that we are not examining the hedonic benefits of shopping, as when market mavens draw enjoyment from obtaining deals on well-known brands. Rather, the study focuses on the custom context or event following the purchase. Based upon an analysis of 71 grocery product categories, we find that responses to price cuts (15 percent) are significantly influenced by whether or not the product is likely to be consumed for fun or function. Consumers are less sensitive to price changes for products consumed for hedonic purposes than for functional purposes. It is noted that whether individuals are equally price-sensitive when purchasing products for functional (e.g., purchasing frozen vegetables or paper towels) versus hedonic (e.g., purchasing ice cream or cookies) consumption situations. The model is embedded in a learning theory paradigm that explains why price sensitivity has become an increasingly popular phenomenon. The model and the methodology used in this study can help researchers and practitioners to better understand and cope with price sensitive consumers. Conclusion It is important to note that in this study the analysis of price sensitivity is restricted to the domain of electronic entertainment for two reasons. First, it is assumed that the determinants and consequences for price sensitivity in miscellaneous products categories. Price-sensitive customers switch repeatedly, pursuing the lowest price. But when they arrive at the best priced supplier, they are unlikely to leave, even if they claim that they will do - they may be unimpressed by the quality of customer service, but they are motivated by price, and until they find better prices elsewhere, they will stay. The consumers seeking to derive fun or recreation from product use are less motivated to be price sensitive than when shopping for products that provide primarily functional benefits. Price sensitivity however is not just about charging high prices to maximise revenue. It might also make sense to cut prices - sometimes dramatically - to encourage people who may otherwise not be part of the market to use the services or goods being provided. Bibliography Allen, Beth & Thisse, Jacques-Francois, 1992. "Price Equilibria in Pure Strategies for Homogeneous Oligopoly," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(1), pages 63-81, Spring. Clausen, Gunnar. Price Sensitivity for Electronic Entertainment: Determinants and Consequences, Tourism Management. Volume 26, Issue 5, October 2005, Pages 753-762 De Fraja, Gianni, 1999. "Regulation and access pricing with asymmetric information," European Economic Review, Elsevier, vol. 43(1), pages 109-134, January. Dellaert, B.G.C. and Lindberg, K.”Variations in Tourist Price Sensitivity: A Stated Preference Model to Capture the Joint Impact of Differences in Systematic Utility and Response Consistency” Leisure Sciences, Vol. 25, No. 1, 1 Jan. 2003 , pp. 81-96(16). Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 515-39, October. Stock, Ruth Maria. (2004). “Can Customer Satisfaction Decrease Price Sensitivity in Business-to-Business Markets?”, Journal of Business-to-Business Marketing, Vol. 12. Iss. 3. at 59 – 87. Wakefield, L. Kirk and Inman, J. Jeffrey. “Situational price sensitivity: the role of consumption occasion, social context and income”, Vol. 79 Iss. 4. Journal of Retailing, Volume 79, Issue 4, 2003, Pages 199-212. Babson. Read More