Episode #343: Price Sensitivity Factors in the Subscription Business Model

343 price sensitivity 300px.jpg

This episode was a reboot of Episode #61. See that show’s notes for more detail on the 10 price sensitivity factors. In this episode, we discussed these 10 factors in the context of the subscription business mode.

The following is excerpted from Chapter 14 of Ron’s book, Pricing on Purpose: Creating and Capturing Value.

Price Elasticity vs. Price Sensitivity
Certainly mathematics has its place in pricing, allowing us to test, predict, and determine elasticity. Yet, since pricing is an art more than a science, judgments are also vitally important and cannot be substituted with mathematical precision.

Even if a company possesses a precise elasticity calculation it knows is accurate, it would only be part of the puzzle of pricing. Since elasticity normally lumps “consumers” together, it does not help us in segmenting customers into different value propositions, thereby offering individuals different bundles in order to maximize profit.

Ten Factors of Price Sensitivity
Thomas Nagle identifies ten factors affecting price sensitivity in their book, The Strategy and Tactics of Pricing.

  1. Perceived Substitutes Effect

    This effect states that buyers are more price sensitive the higher the product’s price relative to its perceived substitutes.

  2. Unique Value Effect

    Buyers are less price sensitive the more they value the unique attributes of the offering from competing products. This is precisely why marketers expend so much energy and creativity trying to differentiate their offering from that of their competitors.

  3. Switching Cost Effect

    Buyers will be less price sensitive the higher the costs (monetary and nonmonetary) of switching vendors.

  4. Difficult Comparison Effect

    Customers are less price sensitive with a known or reputable supplier when they have difficulty in comparing alternatives.

  5. Price Quality Effect

    Buyers are less sensitive to a product’s price to the extent a higher price signals better quality. These products can include image products, exclusive products, and products without any other cues as to their relative quality.

  6. Expenditure Effect
    Buyers are more price sensitive when the expenditure is larger, either in dollar terms or as a percentage of household income. Business purchasers look at the total amount of the purchase, while households will compare the expenditure to total income.

  7. End-benefit Effect

    This effect is especially important when selling to other businesses. What is the end-benefit they are seeking? Is it cost minimization, maximum output, quality improvement? The fulfillment of the end-benefit is often gauged by its share of the total cost.

    The end-benefit effect is also psychological. Think of going out for a romantic anniversary dinner and paying with a two-for-one coupon. Think of the Michelin tire ads showing a picture of a baby in diapers next to its radial tire proclaiming, “Michelin. Because so much is riding on your tires.”

  8. Shared-cost Effect

    When you spend someone else’s money on yourself, you are not prone to be price conscious. This is one reason airlines, hotels, and rental car companies can all price discriminate against business travelers, because most of them are not paying their own way.

  9. Fairness Effect

    Notions of fairness can certainly affect customers, even when they are not economically (or mathematically) rational. We accept discounts more naturally than premiums.

  10. Inventory Effect

    The ability of buyers to carry an inventory also affects their price sensitivity. The perishability of the item in question is another factor to consider.


In the subscription model, these ten factors reside in your strategy, positioning, branding, marketing, and value proposition. They are spread across the entire portfolio of customers.

Search, Experience, and Credence Attributes
From a marketing perspective, products and services can be separated into three useful classes: search products, experience products, and credence products.

Search products or services have attributes customers can readily evaluate before they purchase. A hotel room price, an airline schedule, television reception, and the quality of a home entertainment system can all be evaluated before a purchase is made. Price sensitivity is high with respect to products with many substitutes, and since most buyers are aware of their alternatives, prices are held within a competitive band.

Experience products or services can be evaluated only after purchase, such as dinner in a new restaurant, a concert or theater performance, a new movie, or a hairstyle. These types of products tend to be more differentiated than search products, and buyers tend to be less price sensitive, especially if it is their first purchase of said product.

Credence products or services have attributes buyers cannot confidently evaluate, even after one or more purchases. Thus, buyers tend to rely on the reputation of the brand name, testimonials from someone they know or respect, service quality, and price. Credence products and services would include healthcare; legal, accounting, advertising, consulting, and IT services; baldness cures; pension, financial, and funeral services; and even pet food (since you have to infer if your pet likes it or not). Credence services are more likely than other types to be customized, making them difficult to compare to other offerings. Because there are fewer substitutes to a customized service, and there is more risk in purchasing these types of services, price sensitivity tends to be relatively low.

Our New Patreon Offerings
Check out our new ways to subscribe to The Soul of Enterprise.