#2 Price Sensitivity & Segmentation, Part 1
This is the next in a series of blog posts that will dive deeper into strategic pricing tips posted on 8/14/14. We’ll continue with #2: Price Sensitivity & Segmentation:
Price sensitivity is not constant by customer, product, or order. Here are some examples:
- Customers are not equally price sensitive to all products. I will use myself as an example for this. I prioritize trips and experiences over hard goods. I like to take nice trips and invest my money in meaningful experiences. I don’t hesitate to spend a premium for a profound experience. On the other hand, I drive an inexpensive car that’s nearly a decade old. I live in a small house. I rarely shop for clothes, but when I do, the discount stores are the places I go. I am price sensitive on goods but much, much less so on vacations and experiences. (Interestingly, I have friends that have approximately the opposite price sensitivities to me. They love having something tangible to show for the money they spend and see expensive trips as a waste of money. This teaches that our customers are not a monolithic block of people valuing everything we do equally. More on that later…)
- All customers are not equally price sensitive on a given product. Glidden Paints sells painting supplies to contractors serving many end uses. Consider two segments: #1: Very large painting contractors serving the property management market, a highly competitive and largely commoditized industry. #2: Small, specialty painters who might spend 4 days painting a metallic faux finish on Mrs. Jones’ bathroom. Both segments use paint brushes for cutting in corners, ceilings, trim, etc. Who is more sensitive about the price of these brushes? The large commercial contractor, of course. Same product. Different sensitivity.
- The same customer buying the same product may not be equally price sensitive on every order. One of my clients, an office furniture distributor, provides design, distribution, and installation services. Most of their business is bid-based and highly competitive. They often must price low to win large jobs. Suppose the distributor won a bid to furnish a space containing 100 work stations at 18% gross margin. If their customer wanted to add three work stations six months later, should the distributor supply them at the same 18% margin? No, and they don’t. Nor does the customer expect it, understanding the volume discount of the original order. Same customer and products. Different sensitivity.