You understand your customer’s pain point. You have also figured out a way to create and sell an innovative product that solves their problem. But do you understand how they react to the price tag of your product?
Pricing is a complex subject. A number of factors go into deciding the price for your product. In this article, I will talk about how to segment your customers based on their price sensitivity.
Whether your potential customer will indeed buy your product (or service) depends on where the customer lies at the interaction of two elements – perceived value and the price.
Value is the sum of all tangible and intangible benefits that a customer receives from your product. But wait…it’s not the real value but the perception of the value that influences a customer’s buying decision.
Just carrying a bag with certain logo can give a certain sense of pride and feeling of supremacy to one person. That feeling is enough for the person to spend $2,700. Same person may think twice before spending $27 on a book even though the real value received from the book may be higher, unbeknown to the person.
Price is a hurdle that a potential buyer has to cross in order for him/her to enjoy the perceived value. The hurdle also makes the buyer pause and evaluate alternatives. What similar competing products that she could buy that solves the same problem? Does he even have to solve this problem; why not use the same money and satisfy another need. For example – instead of spending $699 on a tablet, your customer may end up paying the same money towards down payment for a used car. If the price (hurdle) is too high, the buyer may choose to completely ignore the need and may take the money elsewhere to satisfy a completely different need.
Price is also a signal from the seller to the buyer. Your buyer subconsciously sees the price as an indicator of how valuable you see your product for the market. Your buyer also sees the price as a classifier, a divider that separates the ones who can afford from ones who cannot. Since price appears as a hurdle for the every potential buyer, for certain kinds of products, you are also elevating the status of your buyer, if you price is out of reach for other buyers. As a result, you can double the price of your product and still not a lose a customer.
Price and Value Collective
I divide the collective space of value and price into 4 quadrants. Your buyer falls into on these quadrants.
This segment of customers is looking for best return on their investment (ROI) in your product. Their tendency is to look for “deals”. But they will buy your product just because it’s priced low. Product must deliver its benefit that justifies the benefit.
This set of customers is very price sensitive. If you raise the price of your product, the ratio of value to price will no longer be optimal. These customers will either switch or take their money and satisfy a totally different need that delivers a better ROI.
Fans are your product’s fans. The value they receive from the product is significantly high. Either your product is exceptionally superior in quality and utility or your product gives them a unique status symbol that is not available from other products. In other words, your product is a virtual monopoly.
This set of customers is the least price sensitive. It’s possible to increase the price while still able to retain them as customers.
Hoarders are buying because the price is low and they can afford to buy. They are not looking for intrinsic benefit from the product itself. They receive value merely by the possession of a product. They are also extremely price sensitive. Unlike Value Seekers, they are not trying to optimize direct value to price ratio. They look for amount of products owned per total price paid.
And then there is a segment of people who are paying the high price for the product while still receiving low value. But the irony is that this segment is not aware that are not receiving the matching value. It is only a matter of time they become aware and then switch to one of the other 3 segment. Usually, the switching point for this group is a regular and ordinary price increase (or contractual event such as contract renewal time), which triggers them to reevaluate. Through reevaluation the process they discover other competitive options.
Putting it all together
Your target and existing customer base could be a combination of each of these segments. Alternatively, you may be deliberately selling your product to one of these segments.
When creating your pricing strategy, you want to retain high margin and repeat customers while excluding low margin and fickle minded that switch too often.
Through the use behavior analysis, buying patterns and surveys, you can classify customers. Details of such methods are beyond the scope of this article.
Here are some example pricing constructs to apply in order to maximize the retention and profitability from each segment
|Value Seekers||Offer “bundle” options in order to improve value to price ratio|
|Fans||Maintain your brand reputation and uniqueness|
|Hoarders||Buy 1 and get N free. Offer bulk buying option|
|Unaware||Prolong the event that triggers switching. Give incentives to hold long term contracts.|