Charge More, Earn More by Reducing Customer Price Sensitivity

January 31st 2023

With the word recession being thrown about as a warning for months, many business owners are bracing for a downturn in sales. Some have already witnessed a slowdown, while others are seeing sales rise. The discrepancy is likely due to how price sensitive your customers are. That is, can they afford to continue buying what you’re selling?

When the economy experiences a downturn, it can become more difficult for some customers to maintain their level of spending even on basics like groceries (have you seen the price of eggs?!). Some customers may dial back purchases of essentials to tighten up their budgets, others may reduce buying nice-to-have items, such as vacations or eating out regularly, while others may not feel a pinch at all and will continue spending as before.

What is Price Sensitivity?

These three scenarios reflect how price sensitive different customers are. Buyers who are highly price sensitive will reduce spending if the price goes up at all, while buyers who have low price sensitivity will continue spending even if the price goes up significantly.

In general, buyers have less price sensitivity to must-have items such as housing, food, and transportation, because we all need these to survive. Even as prices rise, it’s hard to go without any of these purchases. Conversely, most buyers have more price sensitivity to more luxury purchases, such as new cars, designer brands, or entertainment, meaning that as prices go up, the more buyers scale back their spending on these less essential categories.

But that doesn’t mean that lowering your price is the solution to increasing demand. In fact, depending on your type of customer, lowering your price could reflect poorly on your brand, making it less desirable to buyers. This is likely one of the reasons that Apple products only go on sale one day a year – Black Friday. Yes, you may find incentives to buy them at other times, such as free headphones or an Apple gift card with purchase, but Apple doesn’t discount its products. The same is true with luxury brands, such as Louis Vuitton or Chanel. Those products do not go on sale.

However, there are some brands that seem to always be on sale. Bed Bath and Beyond (BBB) trained its customers to wait for its 20% off coupons to arrive in the mail, with an executive admitting the company’s customers had an “overreliance on coupons.” In fact, even if you forgot them while shopping at the store,  you had 14 days to come back and present your coupons to receive money back.

What Affects Price Sensitivity?

There are several variables that can impact how price sensitive your customers are, with some of the biggest being:

Your product/service category. What you’re selling, and how badly your customer needs it, is perhaps the biggest driver of price sensitivity. For example, for someone who is diabetic and needs medication to manage it, price is less of a factor than their ability to get it. Similarly, a plumber’s fee when the kitchen sink springs a leak or the cost of a tow service when your car dies on the highway becomes less important than the speed with which these pros can respond to an emergency. But if you’re a retailer selling swimming pool equipment in January, your customers may see those purchases as less essential at the moment.

How different or unique your product/service is. Think about Tesla electric vehicles, which have been in high demand for years. You can’t buy them from a dealership and you can’t negotiate price. You either pay the asking price or you don’t get a car. Tesla can set its own price because for a time, it was one of the very few electric vehicle manufacturers. For that reason, its customers had low price sensitivity, because they were willing to pay whatever the price to get one of the company’s electric cars. If you are the only distributor of a particular brand that is in demand, you are likely to attract less price sensitive buyers. That is, they are willing to pay your asking price to get what they want.

The availability of competing products/services. The flipside of uniqueness is competition. If you have a lot of competitors who are selling the same thing you are, or something that can be used in place of what you sell, your customers are likely to be more price sensitive. For example, if you sell ice cream for $3/cone and there is a store across the street selling a similar cone for $2.50, you may have trouble attracting those buyers unless you can differentiate your product. Maybe your cones come in flavors other than vanilla, or maybe the brand of ice cream you sell is only available at your store. Unless you have a way to justify a higher price, your customers are more likely to be more price sensitive if your product or service has a lot of competition.

How easy it is to switch providers. The ease with which customers can switch from one product or service to another is also a factor impacting price sensitivity. The more difficult it is to switch, the less price sensitive those buyers become. Meaning, if it’s hard to go elsewhere for what they need, they may be more willing to continue to pay your (higher) price than make a move. For example, if you are a hairstylist announcing a price increase, the number of customers you lose from that announcement will depend on the relationships you’ve built. The more your customers trust you and prefer your work, the less price sensitive they will be; they may not want to start trying out other stylists. 

How Can You Reduce Price Sensitivity?

So, how can you reduce price sensitivity to keep your existing customers and attract others, even as you increase your prices? 

One way is to improve your customer experience. Make it so far superior to anything they can get elsewhere and you will reduce price sensitivity. That might mean learning their name, taking notes on what they prefer, or going out of your way to make sure they get what they need. Make buying from you a special experience as much as possible.

Determine desired differentiators and build those in. That is, find out what your customers value about your product, service, or business, and do more of that. Amp up what makes your business unique. Separating yourself from the competition will make your pricing less relevant.

You can also invest in marketing efforts to improve your brand’s awareness and reputation. Increase the number of people who have heard of your business and think highly of it (doing more to enhance their buying experience can go a long way to achieve this). That might mean getting some help with social media, paying for PR help, or rebranding the company, to name a few potential options.

The more you make your product or service preferable to buyers, the less price will be a factor for those who choose to do business with you.