OnDemand WTP Pricing Research

The right price, at the right moment, to the right customer | London Business School

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How sensitive is the consumer to the price of the product or service?

Of the companies we surveyed, 41 per cent analysed the sensitivity of their customers to price changes. Of all the factors that should be considered when setting prices, price sensitivity is the most complex to assess. It requires organisations to establish relationships between price changes and shifts in customer purchasing behaviour.

Asking customers about the effects of pricing can be problematic, as they have a tendency to overestimate their price sensitivity.  Comparing the actual behaviour of customers with that predicted by market research can expose alarming variations.

In the case of ongoing service providers, such as mobile or utility companies, life stage can be a major factor in how price sensitive consumers are. People in the process of choosing between suppliers can be highly price sensitive, not least because of the way that providers market themselves.  However, when customers are renewing a contract, they tend to be far less price sensitive.

In food retail, shopping occasion proves to be a driver of price elasticity, as those on a standard weekly shopping trip tend to be more price sensitive than those stopping in for a few items on their way home after work.

In sum, there are stark variations in how consumers respond to price changes that are highly quantifiable.  Those companies that do this can achieve significant competitive advantage.

How does your price proposition compare to that of the competition?

Among those in the retail and service sectors, competitor prices are often given greater prominence in the price decision than any other factor. This is partially because companies have a better understanding of competitor prices than they do of customer value and price sensitivities. It is also because managers assume that pricing is to a large extent “out of their hands” and “at the mercy of the market”.

However, the importance of competitor prices varies markedly. When price sensitivity is measured by retail outlet, the variations in competitive intensity frequently prove to have the greatest import, ahead of other factors such as demographics and shopping occasion.

Competitor reactions can either mitigate or accentuate the effects of a price change.

Very often, one company’s price change will be quickly mimicked by the competition, reducing the impact of the change. This can occur for both price increases and decreases.  In the case of decreases it can lead to destructive price wars.

Conversely, competitors can exploit the opportunity presented. If company A’s prices rise, company B could institute a sales drive. This can be observed in the utility energy markets. Following a rise by one competitor, other competitors may seek to capitalise on a sales opportunity in the short term, and then follow the price rise themselves later on. Thus, the competitor that led with the price rise will see a substantial impact on volumes in the short term but little impact in the medium term once the competition matches their move.

There are often many alternatives for competitor reactions to a price move.  Scenario modelling can be the best approach to modelling competitor reactions.  Our research suggested relative infrequent use of scenario modelling in determining an optimal price move.

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The right price, at the right moment, to the right customer | London Business School.

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