Expected product price as a function of factors of price sensitivity

Abstract

PurposeThis paper presents a model relating Nagle and Holden's factors of price sensitivity to expected price and willingness to pay. This work presents various perspectives on price elasticity/sensitivity, empirically tests aspects of the influence of perception of the offer (product/service) on expected price, and illustrates how the pricing methods developed within provide quantitative precision to the practice of price setting by capturing perceptions important to consumers.Design/methodology/approachThe authors used a within‐subjects design to study four brands in two product categories, automobiles and computers. Model evaluation employs ordinary least squares regression.FindingsTen qualitative factors were studied. Overall, the results show four factors predict expected price for the target market, product and brand. The factors are perceived substitutes, quality, fairness, and unique value.Originality/valueThis research makes the following contributions. First, the authors are able to quantify ten factors of price sensitivity relevant to the evaluation of product pricing. Second, they are able to identify the relevant factors of price sensitivity for two product categories specific to a given target market. Third, they provide a data‐driven model that enables translation of pricing variables into quantitative values to arrive at the price of a product. The major theoretical contribution of this paper is to show that Nagle and Holden's ten factors of price sensitivity may act in the following way: the change in product/service perception may influence expected price, and then the change in expected price influences willingness to pay. The empirical focus of the current research is on the first of these two changes.