Pricing 353
The conventional analysis of elasticity and the
associated revenue implications shown in Table
13.2 are based on the assumption of an inverse
price–volume relationship (i.e. price and
volume move in opposite directions); however,
‘if buyers infer quality to the product or
service on the basis of price and thereby
perceive a higher priced item as more
attractive, a positive price–quantity
relationship ensues’ (Monroe, 1990,
pp. 37–38).
The price elasticity formula provides no clue as
towhydemand may be elastic or inelastic (i.e.
the conditions under which buyers are likely to
be more or less price sensitive). This is
perhaps the greatest shortcoming of the
economic analysis of price sensitivity, since it
fails to provide the price decision maker with a
framework within which the various factors
that may influence the degree of price
sensitivity can be considered. Indeed, it has
been noted that even leading consumer goods
companies are confused about the correct
interpretation (and use) of the price elasticity
concept (Davey et al., 1998).
Bearing the above in mind, what are the key
factors that contribute to customers’ price
sensitivity (or lack of)? Several – often inter-
related – factors have been identified in the
literature, as summarized below. For more
details and illustrative examples, see Morris
and Morris (1990), Simon (1992), and Nagle and
Holden (1995).
Availability of acceptable substitutes. This is
probably the most obvious factor that affects
price sensitivity and has long been pointed out
as such by economic theory. The fewer the
substitutes from which a customer can choose,
the lower the price sensitivity for any
particular alternative. Conversely, even if
market (i.e. primary) demand is inelastic, brand
elasticity may still be high because of the
availability of alternative products and/or
sources of supply.
Awareness of available substitutes. While the
existence of many substitutes is a necessary
condition for high price sensitivity, it is not a
sufficient condition. Customers must be aware
that such substitutes doin fact exist and it
cannot be taken for granted that customers
will be well informed about substitute
availability (or even that they will always tryto
become informed). As Nagle (1987, p. 60)
points out: ‘the existence of less expensive
alternatives of which buyers are unaware
cannot affect their purchase behavior’.
However, the advent of the Internet has meant
that prospective buyers now have much
reduced search costs (Bakos, 1997) and are
thus much better informed about the range of
products available (Lynch and Ariely, 2000).
Transparency of prices. This is a factor
contributing to substitute awareness. If price
features frequently in advertisements,
brochures, etc. of the product in question,
then buyers are likely to be more price aware.
Moreover, if price comparisons are easy to
undertake as a result of similar pricing
conventions by different suppliers (e.g. petrol
prices), the buyers will be able to determine
the true price differences involved. Both these
factors are likely to impact positively on the
degree of price sensitivity. Again, the availability
of online price comparison sites (e.g.
ShopSmart, Pricerunner, Kelkoo, DealTime,
easyValue, CheckaPrice) has resulted in both
greater price transparency and lesser burden
on consumers in terms of maintaining their
price awareness.
Purchase frequency. This is a factor affecting the
amount of information possessed by buyers. For
products that are frequently purchased, buyers
are more likely to develop a good appreciation of
the various product alternatives and range of
prices available, and thus become more price
sensitive than for infrequent purchases. The ease
with which online shopping lists can be stored
for future reference suggests that, particularly
for grocery shopping (e.g. via sites such as
Asda.co.uk and Tesco.com), price awareness and
sensitivity are likely to increase.