Price sensitivity will be significantly affected by the nature of the purchase and its context in the life of the consumer. There will be a number of factors involved here.
Significance to financial position
The purchase that takes a high proportion of the consumer’s income (or, in the context of an industrial purchase, constitutes a high proportion of cost and profit) will be more likely to be price sensitive. Thus a regular purchase such as newspapers or bread will have high price sensitivity because the consumer will realize the importance of that purchase to her total financial position. In addition, the regularity of purchase will make the buyer more informed and more likely to shop around.
It is not all to do with regularity, however. A high proportion of income can also be taken by the one-off, big-ticket purchase, such as a house, car or domestic appliance. Extra price sensitivity will apply in this case too, because of its significance to income and because of the resultant willingness to carry out research. The one-off purchase that is low in financial significance – for instance the hairdryer or the coffee maker – will generally have relatively low sensitivity because the total impact on income is small. For similar reasons, businesses that supply other companies with small-ticket, one-off purchases such as books, directories or pictures can find extremely low sensitivity and often charge very high prices, knowing that the cost is relatively insignificant to the person who authorizes it.
In business-to-business transactions, this factor can be used to advantage by the intelligent sales person. Those who are involved in what is often called value selling will know that a key requirement for effective pricing is to have a clear understanding of the place of your product in the customer’s total cost structure, and to know the likely impact on cost and profitability levels of price changes in both directions. If you are supplying fundamental raw materials that make up 50 per cent of total cost or selling price, then price sensitivity will be high; if you are selling a component which makes up only 5 per cent of total cost, sensitivity will be much lower, particularly if the impact of inferior quality is likely to be serious.
Unit of purchase
Price sensitivity will be much greater when there is an obvious and accepted unit of purchase, which is commonly accepted throughout the industry. This is clearly so in many sectors – consumers will buy a newspaper, a car or a television with the clear ability to make direct and meaningful comparisons. There will still be
The drivers of consumer price sensitivity
differences of type and quality, but a car is a car and only one car is being bought at the time of purchase.
In other cases, however, the unit of purchase is less clear and this may be compounded by changes over time, for example the move to the metric measurement system in some Western countries has made it much more difficult for the consumer to make comparisons and assess value. Though the purchase of vegetables and petrol may be relatively price sensitive for other reasons quoted in this chapter, the lack of uniformity and common understanding caused by the change in measurement system has worked the other way. Consumers become confused and will make comparisons in different ways; some will look at the cost per unit of cauliflower, some per pound and others per kilo.
One other significant and related factor is whether the decision will be ‘yes/no’
or ‘variable purchase’. Will a high price cause the consumer to refuse to buy at all, or will the decision be to buy a lower quantity? If the consumer is faced with highly priced vegetables or petrol, she may well decide to buy less for the amount of money that she is willing to pay. Clearly this will be dependent on alternative options and competitor prices, but the very fact that a variable quantity purchase is available will reduce the sensitivity, particularly if the purchaser is under short- term pressure to buy. If you are low on petrol and the next station is some distance away, you will put £5 of petrol in your tank almost irrespective of price.
Individual or corporate purchase
It is a fact of life that most people are less careful with their employers’ money than they are with their own. In fact, it is often held to be an example of good management practice if staff can be influenced to spend the company’s money as they would their own, but this is the exception rather than the rule. Therefore the price sensitivity of corporate purchases can be much lower than those of the individual.
A revealing example of this lower sensitivity is the purchase of airline tickets.
The individual purchaser is usually highly price sensitive, buying largely on price because it is a major purchase from the personal budget. There may even be a certain kudos from obtaining a good deal, which may be shared with friends at dinner parties. Yet that same individual, when buying an air ticket for personal use through the company, may not be price sensitive at all because the company is paying. In fact, the conversation at the dinner party will emphasize the high cost as a sign of status, showing that the company is prepared to pay many times more for business or first-class travel. Clearly this is partly to do with the extra benefits which come with higher-class travel, but it is interesting that these benefits are less appealing when the individual is paying!
42
Pricing for Long-term Profitability
Specialist knowledge of the buyer
In practice, not all companies allow their staff to choose how they travel and the price that is paid. Increasingly, large international businesses are realizing that the cost of air travel is a major one and needs to be controlled more closely, using specialist buying expertise. This is an illustration of what is probably the key factor in price sensitivity in business-to-business transactions – whether the company has a specialist buyer who is dealing with the purchase and who has developed superior knowledge, experience and expertise. Price sensitivity will be at its lowest when the purchase is a one-off acquisition of a product or service where the main decision maker is a functional specialist who is not used to handling such transactions. An example would be the occasional purchase of training or consultancy services by a line manager who does not often do such deals.
Understanding of this element of sensitivity can lead to a segmentation strategy that expressly avoids those companies which are likely to involve specialist buyers in the purchasing process. If dealings can be kept informal and friendly, competitors can be kept out of the picture and price sensitivity can be maintained at a low level. This is one reason why relationship marketing has become such a key issue in business-to-business transactions – a good relationship can keep price well down the agenda compared with other factors and can avoid the formalities, and the greater emphasis on price, which comes with competitive tendering.
This business-related example illustrates a broader principle which is fundamental to price sensitivity in all markets – the extent to which consumers are generally well informed about the alternatives that exist and the prices that are charged in the market. The more informed they are and the more research they carry out, the higher will be the price sensitivity.
In consumer markets two important developments have helped consumers to become more informed. One has been the introduction of consumer magazines, which increase the information available to buyers while also reassuring them (or otherwise) about relative quality. The other has been the Internet, which has made it much easier for consumers to search for more information and to find out the range of price options. The information available to a competent Internet user with a search facility represents an interesting contrast to what is accessible in a single retail store or in a single mail order catalogue.
Time and occasion of purchase
The time and occasion of purchase will have a major impact on price sensitivity of many products in the service sector and will allow the adoption of what is often called ‘differential pricing’. This means the fixing of different prices for what is essentially the same product, because of the impact of time and occasion on the
The drivers of consumer price sensitivity
likely demand from customers. The most obvious example is the type of ‘peak time’ pricing which is typical of air and rail travel – the provider is fixing price to maximize the return from the scarce resources available at busy times, while also using it to transfer some of the demand into quieter periods. The key to success is still to provide value to the target customers in the different time segments so that they are not tempted to turn to alternative times or to choose to use other services.