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Price Sensitivity and the Opportunity to Improve Margins

Most commercial diligence projects will query the channel and the end-customers to measure price sensitivity. Most CIMs will have a graph indicating the degree to which customers are, or are not, sensitive to price – and suggesting room for margin enhancement. However, relying on customers’ or the channel’s expression or “vote” on price sensitivity can lead to false commercial diligence conclusions.

The better way to obtain a clear picture of what kind of pricing opportunity exists is to gain a true understanding of three key factors influencing price sensitivity:

  1. Perceived Differentiation: To what extent do customers believe the Target company’s products and services are differentiated? And, to what extent are customers seeking differentiation? Note: when it comes to pricing, “seeking” can be very different (and more meaningful) than “appreciating” differentiation)
  2. Operational Criticality of the Product or Service: How important is the product or the service (emotional fulfillment can be as, or more, impactful as functional fulfillment)?
  3. Value Relative to Alternative Discretionary Spend Items: The real competition is all the other ways that budget can (and will) be spent. How does this spend category stack up relative to other priorities throughout the household or the organization? How much budget pressure is there for this line item in the next year? In the next 3 years? Why is there not more latitude for this spend item?

You need to take a thorough investigative approach, meaning a large enough, representative, sample of the key segments. This is ultimately a subject better explored through careful discussions with customers – avoiding leading the witness – than it is through a survey that seeks to capture customers’ supposed indifference to price changes.

You will also want to compare results of how the Target’s customers view the issue against how the Target’s competitors’ customers view the issue.

If you understand the above three factors, and when you then incorporate the degree to which the Target company’s brand is performing on various drivers of choice, you will have a good feel for what kind of opportunity there is to move price, and how to exercise that opportunity.

Increasing price and developing a sound segmentation- or channel-based product and pricing strategy are, of course, items that need to be on everyone’s consideration list. There are other things to examine (e.g., ASP history) and there will be more to do post-acquisition (e.g., detailed quant analysis, conjoint, customer segmentation, product positioning, product tiers, etc.) before you can trigger a measured increase on price, but this investigative approach will prove to be a more sound measure than a simple survey that “tests” customers’ willingness to pay.

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