Gauging Customer Price Sensitivity
In their book The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making, Second Edition, Thomas T. Nagle and Reed K. Holden offer a set of questions that should be asked in order to gauge customer price sensitivity:
1. Perceived substitutes effect. What alternatives are buyers (or segments of buyers) typically aware of when making a purchase? To what extent are buyers aware of the prices of those substitutes? To what extent can buyers’ price expectations be influenced by the positioning of one brand relative to particular alternatives, or by the alternatives offered them?
2. Unique value effect. Does the product have any unique (tangible or intangible) attributes that differentiate it from competing products? What attributes do customers believe are important when choosing a supplier? How much do buyers value unique, differentiating attributes? How can one increase the perceived importance of differentiating attributes and/or reduce the importance of those offered by the competition?
3. Switching cost effect. To what extent have buyers already made investments (both monetary and psychological) in dealing with one supplier that they would need to incur again if they switched suppliers? For how long are buyers locked in by those expenditures?
4. Difficult comparison effect. How difficult is it for buyers to compare the offers of different suppliers? (Be sure to account for the Internet in your answer). Can the attributes of a product be determined by observation, or must the product be purchased and consumed to learn what it offers? What portion of the market has positive past experience with your products? With the brands of the competition? Is the product highly complex, requiring costly specialists to evaluate its differentiating
5. Price–quality effect. Is a prestige image an important attribute of the product? Is the product enhanced in value when its price excludes some consumers? Is the product of unknown quality and are there few reliable cues for ascertaining quality before purchase?
6. Expenditure effect. How significant are buyers’ expenditures for the product in absolute dollar terms (for business buyers) and as a portion of income (for end consumers)?
7. End-benefit effect. What end–benefits do buyers seek from the product? How price sensitive are buyers to the cost of the end–benefit? What portion of the end-benefit does the price of the product account for? To what extent can the product be repositioned in customers minds as related to an end–benefit for which the buyer is less cost sensitive or which has a larger total cost?
8. Shared-cost effect. Does the buyer pay the full cost of the product? If not, what portion of the cost does the buyer pay?
9. Fairness effect. How does the product’s current price compare with prices people have paid in the past for products in this category? What do buyers expect to pay for similar products in similar purchase contexts? Is the product seen as necessary to maintain a previously enjoyed standard of living, or is it purchased to gain something more out of life?
10. Inventory effect. Do buyers hold inventories of the product? Do they expect the current price to be temporary?