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Price Sensitivity

Companies can reduce price sensitivity of customers and have more scope for moneuvring their Pricing strategies.

Price sensitivity of customers will determine the latitude that a company will have in increasing its price. A company should know the price sensitivity of its customers and the factors affecting it. In certain situations a company may be able to explore opportunities to reduce price sensitivity of its customers if it develops a keen understanding of his motivations in making the purchase, the purpose for which he uses the product and the very nature of the product.

Below are Few of the Factors that Affect Customer’s Price Sensitivity

A customer is price sensitive if he bears the cost as opposed to a third  party. The customer is also less price  sensitive if he does not have to make the payments upfront. Allowing customers to pay later may make the customer less fixated on the price. Arranging a loan for the customer will allay the concern of high price. The customer does not mind paying a slightly higher installment but he might not be willing or able to pay the high initial price.

If the payment for some services are being made by insurance companies or come as perks, the customers will not worry about price and seek the best service. Servers providers should seek such businesses and offer premium quality of services. Pharmaceutical companies will have a greater pricing latitude if neither the prescriber nor the patient paid  the cost of the medicines, but the price was paid by an insurer.

A customer is also price sensitive if the cost of the item represents a substantial percentage of a customer’s total expenditure. The choice of the target market becomes very important. In generic terms, a wealthier segment would be less price sensitive and should be targeted. Industrial marketers can target such customers for whom their product will be minor purchase in comparison  to the other purchases that they make.

If the buyer is not the end-user and he sells his end product in a competitive market, price pressure from further down a distribution channel ripples back up through the chain. For instance, one steel producer was able to obtain good margins by selling a component to buyers who then produced specialty items for end-users.

Buyers of the specialty item were less price sensitive. Selling that same component to buyers who made products for commodity­ like markets meant lower realized prices as the end-users were more price sensitive. Therefore, the company will have to evaluate the price sensitivity of its customer’s customers and target such customers whose customers, in turn, are less price sensitive.

The customer is more likely to be price sensitive if he is able to judge quality without using price as an indicator. A customer’s price sensitivity will be more also if the product is one for which it is easy to make comparisons. For instance, it is easier to compare cameras than it is to compare computers. A customer will be more price sensitive if there is limited difference between the performance of products in the category.

A company will have to make it difficult for customers to evaluate quality and make comparisons. A company should desist from using purely functional attributes as competitive  parameters. In most categories, with some ingenuity, products can be imbued with some sense of style, fashion, color, sensuality and grandeur. Customers will be unable to put a monetary value to these attributes. In hard-to-judge categories such as perfumes, price has little impact because the customers assume that high price  and high quality go together.

A customer will be price sensitive if he can easily shop around and assess the relative performance and price of alternatives. Advances in information technology will enable customers to increase their awareness of prices and access to alternative options. Price sensitivity of customers is going to increase in a wide range of products and services.

It will be dangerous to deny access to one’s product, or information about it, as the customer may just refuse to buy unless he has made the required comparisons. The only solution will be to imbue the product with elements of style, fashion and sensuality which will make comparisons difficult.

A customer will be price sensitive if he can take the time he needs to locate and assess alternatives. For instance, in an emergency, the speed of delivery will be crucial. Price will not be the primary factor determining the purchase. A sense of urgency has to be created in the buying situation. Products may have to be phased out more regularly and threats of impending stock-outs should sound real.

A customer will be price sensitive if he can switch from one supplier to another without incurring additional costs.

A customer will also be price sensitive if the long-term relationship with the company and its reputation are not important and the customer’s focus is on minimizing the cost of the particular transaction. Easing the process of procurement for the customer by taking responsibility of maintaining enough inventory with the customer and ensuring automatic replenishment will bind the customer to the seller. He will not be sure if the next supplier will do so much.

The seller will have to prompt the customer to invest in the relationship. Joint efforts and exercises to increase quality and productivity will keep the customer interested in the relationship. The customer should  be made to feel that he is getting  more than the product or the service that he is buying from the seller. The seller has to create a web of services and interactions around the product sold and shift the customer’s attention from the product.

Sadly most companies take the level of their customers’ price sensitivity as something they cannot do anything about and shudder to increase prices even for very legitimate reasons. But companies can take steps to reduce the price sensitivity of their customers and thus be able to charge higher price.

See also  6 Ways to Fight a Price War

About Sonia Kukreja

I am a mother of a lovely kid, and an avid fan technology, computing and management related topics. I hold a degree in MBA from well known management college in India. After completing my post graduation I thought to start a website where I can share management related concepts with rest of the people.