What is price sensitivity?
Price sensitivity measures how much a customer’s buying behavior shifts when a product’s price changes. Highly sensitive customers may switch brands, delay purchases, or buy in bulk. Low sensitivity usually reflects brand loyalty or a perception of added value.
Why price sensitivity matters
It affects how shoppers respond to discounts, promotions, and price increases. Retailers who understand when and where price matters can avoid over-discounting and better align pricing with customer expectations, protecting margins while staying competitive.
How price sensitivity works
Retailers analyze sales trends, shopper behavior, and competitor pricing to:
- Pinpoint which SKUs or categories are most price-sensitive
- See how sensitivity varies across segments or channels
- Forecast customer response to pricing decisions
- Guide promo planning based on expected reactions
Price sensitivity calculation
The Price Sensitivity Index (PSI) quantifies how strongly sales volume responds to a change in price. It’s calculated as:
Price Sensitivity Index (PSI) = % Change in sales volume ÷ % Change in price
- PSI > 1 means customers are highly sensitive to price changes
- PSI < 1 means customers are less sensitive
Note: This is a simplified estimate — real-world sensitivity depends on factors like seasonality, competition, and shopper behavior.
Practical example
After a 10% price increase:
- Sales of a generic dish soap drop by 25% (PSI = 2.5, highly sensitive)
- Sales of a luxury skincare serum drop by 5% (PSI = 0.5, low sensitivity)
Product A (dish soap) is more price-sensitive, meaning customers switch easily. Product B’s buyers are less reactive due to brand loyalty or perceived value.
