Consumers are becoming increasingly price-sensitive: how can companies manage this?
11/07/2024
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Is this the result of the waning inflationary crisis? The fact remains that more and more consumers are paying attention to prices. This does not mean that they necessarily want the cheapest product. A great deal of research shows that the link between demand and price is more complex than the basic law of supply and demand suggests.
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Research conducted by the BCG consulting firm revealed that between 70% and 90% of consumers worldwide, across both rich and poor countries, describe themselves as “value-conscious.” However, the report cautions against assuming that consumers always prefer the lowest price.
Price is a key marketplace cue because it is present in all purchase situations. However, being “price-conscious” doesn’t necessarily mean seeking the cheapest option, it involves a deeper consideration of value, context, and personal circumstances.
The complex interplay of these factors shapes how consumers view the cost of the same product. This has important implications for companies: to develop effective pricing strategies, businesses must go beyond simplistic assumptions and understand the core drivers of consumers’ price sensitivity.
The importance of context
The context, type of product, urgency, social settings, and specific marketing triggers like promotions can significantly influence perceptions of price and sensitivity.
Starting with the context in which a price is presented, this plays a crucial role in shaping how customers perceive its value. A study by researchers Wakefield and Inman shows that consumers are less price-sensitive in social settings, where purchases are often driven by social approval or emotional experiences. For example, a bottle of water costs more at a restaurant or music festival than at a local grocery store because the context — convenience, scarcity, and event atmosphere — adds perceived value.
Consumers sensitivity to price is also influenced by the type of product. For instance, studies conducted by professors from American universities shows that consumers often opt for lower-priced alternatives in categories like groceries or household goods but may be willing to invest more in items where quality or emotional satisfaction is paramount, such as technology or personal care products. This trend is particularly pronounced for “hedonic goods” (goods associated with positive feelings or pleasure) or experiences like going to the cinema. In such situations, emotional value can overshadow price concerns. Conversely, research indicates that for functional products like groceries or household supplies, consumers, especially those from lower-income groups, tend to exhibit heightened price consciousness due to tighter budget constraints.
Therefore, product type plays a crucial role in shaping price sensitivity: functional items prompt more price-conscious behaviour, particularly among lower-income consumers who actively seek out deals and compare prices. In contrast, hedonic products generally attract less price sensitivity, particularly among higher-income segments. These findings are essential for companies; while premium pricing may work for hedonic products, competitive pricing or discounts are more appealing for functional items.
Scarcity and cognitive load impact price sensitivity
But these are not the only important factors. Other factors come into play, such as scarcity and cognitive load. We have a limited capacity to process all the information around us – this is known as cognitive load, a concept well studied in social psychology. This load, combined with scarcity, directly influences the way we, as consumers, make decisions, particularly in terms of price sensitivity.
Limited financial resources, both in terms of money and access to it, force consumers to make considered compromises, weighing up every euro spent carefully. For example, without immediate access to their wallets, they become more careful about what they spend.
Research from Princeton University shows that scarcity of a product makes individuals focus more carefully on trade-offs they face, making price a central factor in purchasing decisions.
When resources are limited, cost becomes more important, increasing price sensitivity. When consumers have limited financial resources, they become more consistent in their evaluation of products, carefully weighing the trade-offs between their different needs. This behaviour is particularly marked in low-income consumers, who are under greater emotional and cognitive pressure when making purchasing decisions. As a result, research shows that they are more likely to think long and hard, increasing their sensitivity to price as they seek to maximise the value of each expenditure. For businesses, this means that targeting low-income consumers requires a focus on value rather than simply offering low prices.
The price of flexibility
In contrast, research confirms that higher-income consumers are more willing to pay extra for flexibility in purchases like airline tickets, where convenience and potential cost savings from flexible options outweigh price concerns. This is one good example of price conscious consumers, that are not necessarily looking for cheaper prices.
Wealthier consumers, in general, are less responsive to small price fluctuations, particularly in categories where convenience or emotional satisfaction plays a significant role. For example, higher-income consumers may be willing to pay a premium for flexible services, such as airline tickets with added benefits or for purchases in certain markets with higher-priced products, as the cost of searching for lower prices outweighs potential savings. However, they still weigh up whether the added convenience justifies the higher price, making calculated decisions before making a purchase.
This suggests that companies targeting affluent consumers can incorporate premium pricing strategies by offering additional value through services or features without significantly affecting demand.
The role of discounts and other offers
Surprisingly, price perceptions and sensitivity are also shaped by consumers’ perceptions of the macroeconomic environment, not just their personal financial situation. Research in a number of countries has shown that in an unfavourable macroeconomic environment, consumers become even more price-sensitive, especially for essential goods. For example, many consumers became more price-conscious during and after the Covid crisis.
In addition to these contextual factors, discounts or limited-time offers influence price sensitivity. These marketing actions create a sense of urgency, allowing companies to justify higher prices without cutting costs. Lower-income consumers with budget constraints are particularly responsive to these offers. On the other hand, higher-income consumers, whose opportunity cost of time is lower, are less likely to compare prices, preferring convenience and flexibility.
In addition, studies show that large families and those on tight budgets spend more time looking for bargains and are more sensitive to the price of essential goods. These factors underline the need for businesses to adopt nuanced pricing strategies that take account of context, consumer income and specific purchasing circumstances.
Flexible strategies
Price-sensitive consumers are therefore diverse, representing different income levels within the population. Although they share a heightened awareness of price, this does not always lead to the cheapest choices; they assess overall value, including quality, brand reputation and long-term benefits.
To respond to these differences, companies should adopt flexible pricing strategies. In price-sensitive markets, affordable alternatives and loyalty programmes are effective, while affluent markets respond better to value-driven propositions. As the economy evolves, businesses that balance affordability and perceived value will attract a variety of customers, making it important to adapt their pricing strategies.
Jorge Jacob, Professor of Behavioral Sciences, IÉSEG School of Management
This is an English version of the article originally published on The Conversation France.
