What Nine Factors Determine Price Sensitivity?
Updated: Sep 14
Understanding pricing sensitivity helps us navigate negotiations, prepare better proposals, match customer needs, and get to a close.
How price sensitivity factors are shaped and influence the sales process will impact the customer's intention to purchase. Sensitivity to price does not always represent a discount, and there can be times when the price is in the background.
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 effective you are in building value, the lower the price sensitivity. When you introduce a price before you have built value, you will typically get a price objection.
The Substitution Factor
How many choices are available that 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. It's vital to understand what substitutes might be introduced and be prepared to counter the sensitivity to price.
The Comparison Factor
Years ago, the comparison of 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.
In media and the auto category, for example, online comparisons have reduced pricing power. 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.
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
If your customer has access to cooperative funding to help pay for a campaign, this can lower price sensitivity. 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.
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 questions about quality.
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. It’s fine to promote the inventory demand impacting price, 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.
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.
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About Alec Drake:
As President of Drake Media Group, a content creation and sales consulting company, Alec is on a mission to share his unique perspective on best practices to enhance sales performance and drive revenue. The company offers a range of consulting expertise, including sales operations, team and individual coaching, yield and revenue management strategies, event sponsorship formats, and sales marketing.
Drake Media Group, LLC retains exclusive rights to the original content in all articles written by Alec Drake, contained in any podcast appearances, or articles published on third-party platforms.