Price Sensitivity: Definition, How It Works, Example

You might not be aware of it, but price sensitivity likely plays a daily role in your life. The economic concept determines many of your day-to-day spending decisions even if you don't think about them directly. Keep reading to learn more about price sensitivity.

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Mall shopper looking at receipt and holding grocery bag. — Image source: Getty Images.

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There are other factors that influence price sensitivity. One of those is rarity. Rare products like collectibles, art, or luxury products tend to have less price sensitivity. Often, consumers want the products in part because they are rare, which is unrelated to the price. By contrast, an individual product that is common and not unique, like a commodity, will have higher price sensitivity.

Switching costs also determine price sensitivity. If a product has high switching costs, sensitivity will be lower since consumers are essentially locked into buying that item. That explains why Apple (AAPL -1.45%) is able to charge a 30% commission on in-app purchases. Once you own an iPhone or iPad, you have little choice but to pay the fee if you want to spend money in the app. Similarly, developers need to be on those devices, so they also must pay the fee.

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About the Author

Jeremy Bowman has been a contributing Motley Fool stock market analyst, covering technology, consumer goods, and macroeconomic trends since 2011. Before The Motley Fool, Jeremy was a newspaper reporter, restaurant manager, and English teacher abroad. He holds a bachelor’s degree in English from Colorado College and a master’s degree in business administration from American University. One of his Motley Fool headlines was briefly featured on Late Night with Stephen Colbert.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.