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  • Alec Drake

How Can You Manage Price Sensitivity?

Updated: Jan 19

Understanding pricing sensitivity helps us navigate negotiations, prepare better proposals, match customer needs, and get to a close.


FremantleMedia, Public domain, via Wikimedia Commons

Price sensitivity influences the sales process, impacting the customer's purchase intention. Sensitivity to price does not always lead to a discount, and there are times when the price is in the background. Let's review a variety of influences you can consider when managing price sensitivities.

The Differentiation Factor

Differentiation builds value, and companies spend heavily communicating why they are different and why you should be a customer. What attributes for your brand display value versus the competition? How advertisers appreciate and perceive your value will determine resistance to your asking price. The more effectively you build value, the lower the price sensitivity. You will typically get a price objection when you introduce a price before you have built value.


The Substitution Factor

How many available choices appear to be the same as your product? In media sales, we have heard the phrase, "I can buy around you." This effort from the buyer to leverage substitution to lower your rate is common in negotiations. The replacement of your product is prevalent if a metric like Cost Per Point or Cost Per Thousand is the benchmark and they are equivalent. Therefore, telling your story and limiting the substitution effect is essential. Understanding what substitutes might be introduced is vital, and being prepared to counter the price sensitivity.


Image by Gerd Altmann - Pixabay

The Comparison Factor

Years ago, comparing products and services was difficult based on limited access to information. Today with transparency at everyone's fingertips on the internet, the comparison effect has become more predominant in pricing sensitivity.


For example, online comparisons have reduced pricing power in media and the auto category. The negotiations on the showroom floor have been replaced with more control in the customer's hands, armed with information on competitive pricing and product options. The more straightforward the buying process, the more transparent your pricing will become. One way to counteract the comparison effect is with highly customized proposals and increased value propositions.


The Volume Factor

This pricing factor relates to a buyer who offers to purchase more products to get a discount. Think of your annual customers and renewals suggesting discounts for the business being placed with you. It's important to have terms and conditions that limit the sale of valuable inventory at lower rates. Annual negotiations are complex because they involve several of the factors on this list of price sensitivities happening at the same time.


Image by Dede - Pixabay

The Composition Factor

This composition effect relates to the percentage of the order you receive or "getting a bigger share" of the business.

This effect is more evident in national sales with big budgets and media companies' interest in getting a bigger slice of the pie. Going for share always creates downward pricing pressure.


Even though there is more revenue generated, there is less yield in the process. You must be careful in how much business you take in this scenario to protect your revenue targets and manage future demand opportunities to drive prices higher.


The Proportion Factor

This can lower price sensitivity if your customer has access to cooperative funding to help pay for a campaign. The Co-op customer should be a strong prospect based on this lower sensitivity, and while there is more work involved in managing this account, the return is in better yield. It's wise to offer beneficial (VIP) terms and conditions for this customer to support the higher price and retain a customer focus in the sale.


The Post-Purchase Factor

There can be lower price sensitivity when working on renewals. An existing customer who has experienced the value of your product or service already has a higher value perception and should be less price sensitive. They know your value, and that is why they are coming back. Another example is when an agency buyer wants to repeat a previous buy and does not aggressively push rate negotiation like their first order. It's a "wash, rinse, repeat" approach supported by previous experience.

Image by Gerd Altmann - Pixabay

The Quality Factor

We have all heard the quote, "you get what you pay for," and this basic rule is an example of price as a marketing statement.

A higher price defines quality and value.


If there are two cars for sale, one is $25,000, and one is $50,000, which is the better car? Based only on price, you judge the higher-priced car to be of better quality. The quality of the product also drives demand from specific customers who expect the price to be higher. A price too low based on perceived value creates quality questions.


The Inventory Factor

If there is a belief that prices will be higher in the future or inventory may disappear, there is less price sensitivity. Promoting the inventory demand impacting price is fine, even if that inventory has not been sold. With a strong sales team and a history of sellouts, good forecasting by management will always support higher pricing based on the inventory effect.


Takeaway

In summary, we have seen that various price sensitivities by customers can work to lower or support higher prices. It's essential to recognize where those factors will impact revenue performance and help segment customers. To apply the best pricing practices with these factors in mind, you must be strategic, rely on historical and predictive information, use terms and conditions and be consistent.


The nine factors referenced in this article were initially identified in "Pricing, and Rate Forecasting Using Broadcast Yield Management," written by Shane Fox in 1992, and served to inspire this updated perspective.

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About The Author:

Alec Drake openly shares revenue management strategies and sales improvement ideas in the "Sales Success Library" at Alecdrake.com. He is a regular contributor to Radio Ink Magazine, where he leverages four decades of experience to write about sales and management. Alec is the founder of The Radio Invigoration Project (T.R.I.P.), a support initiative for local radio sales and promotion staff.

Drake Media Group, LLC retains exclusive rights to any original content in articles written by Alec Drake or published on any third-party platforms and featured in any podcast.


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