I have frequently written that not all customers are equally price sensitive. Also, each customer is not equally sensitive on every purchase. Those statements are still true, but the levels of customer sensitivity to prices are now changing. We all can and should prepare for those changes.
How bad is it?
Since the start of the Covid-19 crisis, restaurants, bars, retail stores, gyms, hair salons, dentists and others have been forced to temporarily close their doors. In response, millions of people have been laid off or furloughed. More than 10% of American workers have filed for unemployment, and that number is growing.
In addition to low employment, wealth in the world has decreased. The S&P 500 Index is down roughly 20% since the start of the year, and that is after the index increased 12% last week. Many people have experienced substantial cuts in their compensation, and they feel much less secure than they did two months ago.
How it changes price sensitivity
Some people are more naturally price-sensitive than others, but circumstances heavily influence how sensitive they are for any given decision. For example, I was recently talking with an orthopedic surgeon who had long wanted to live on the Intracoastal Waterway. In February, he and his wife agreed to buy a waterfront house that was listed at more than $4 million. He agreed it was a lot of money, but reasoned that his practice was doing very well. Furthermore unless something happened to him, he could be a surgeon as long as he wants to.
Suddenly, all elective surgeries (like hip and knee replacements) were put on hold and the surgeon was forced to furlough many employees. With substantially less cash coming into the practice, his outlook is significantly worse, and he decided to back out of the home purchase. He also realized banks would be much less likely to give him that large a mortgage if his medical group was not profitable now. So, his price point has changed.
Another example comes from fellow members of a local golf, tennis and beach club. While we historically played golf mostly at the same club week after week, we occasionally played at other private and public clubs in the area. When we ventured elsewhere, there was seldom much discussion about the guest fees or greens fees we would be paying. We decided where we wanted to play and were not worried about the fees, within reason. Now our club is closed, and those who want to play multiple times per week, must go to other courses and pay each time. We now always discuss how much the greens fees will be.
My last example comes from a local home-service business owner. His company is still working, but the volumes are way down. In addition to purchasing fewer products and services for the business, they are looking for lower-priced alternatives. He views it as a question of survival.
How to tell if price sensitivity has changed
My answer to this question assumes you are already measuring customer and product price sensitivity. If you are not doing so, start now. Contact us if you need help. For the rest, your critical first step is to update your data and your algorithms. We have worked with firms who have developed price-sensitivity scores using the last 6, 12, and 24 months of data. Depending on the types of purchases, usually, the more recent data is more heavily weighted. Now and for the next several months, pay more attention to the most recent month or quarter.
Compare a customer’s purchase actions to their old behavior, and also to how other customers are behaving right now. You may find that all customers are more price-sensitive than they were previously, but we still need to know which customers are most sensitive and which are least sensitive, and they may have changed places.
Update your qualitative inputs on each customer. What has changed for them? Are their sales volumes down? Have they stopped new projects, facility upgrades, equipment replacement, etc.? Have they lost their jobs? When those things are true, those customers did not just become price-sensitive, they became non-buyers. Don’t change your prices in reaction to non-buyers. Revise them in reaction to buyers whose price sensitivity has changed.
What to do about it
Deciding what to do about changing price sensitivity depends on who your target customers are, how well they survived the Covid-19 crisis, and how much things have improved. That said, there are some things you should consider:
- If your customers are businesses that had been closed and are coming back online, they are likely to be feeling pain. Offer them low-cost, low-price alternative products that lower their cost of restarting.
- If you are selling services, you may be able to reduce customers’ urge to comparison shop by offering a welcome-back promotional offer for a limited time.
- If you are healthy enough yourself, consider a short period, say 3 months, where you offer the restarting business extended payment terms. That will help them conserve cash, but you must be strict that it is for an introductory period.
- If your target segment is more price-sensitive customers or you are selling entry-level products, hold your prices for now, and consider raising them when we emerge from the crisis.
- This may seem counter-intuitive, but many customers may have shifted from moderately sensitive to highly price sensitive. If you raise your lowest prices slightly, they would still be lower than what those moderate customers previously paid and still seem like a good deal.
- Test this theory before implementing it broadly.
- If you are selling premium products or selling to high-end customers, lowering prices can do long-lasting damage to your brand, but demand may be low due to increased price-sensitivity. Instead, consider offering additional services included in the base price for a limited time. Alternatively, consider offering a descoped product or service (with a lower price) by removing one or more of the most expensive features for a short time. This will respond to your customers’ elevated price sensitivity but preserve your brand exclusivity.
- Monitor your competitors. Some competitors may be undisciplined and believe lower prices are the easy ticket to greater sales. This is especially true if any competitors are just starting up again and trying to gain traction quickly.
- Identify the value you bring versus your competitors and be prepared to articulate and quantify it for your customers. Offer give-get exchanges to preserve business when needed in the face of a competitor’s very low prices. Be careful with this – it can result in price wars.
- As always, continue to service the heck out of your customers, so that prices are less of an issue.
None of us have perfect foresight, and any steps you take will essentially be bets on how customers will respond. It is important not to just default to lower prices but consider how price sensitivity has changed and how you can create customer incentives. It will be helpful to test your theories or bets. Create offers for a random sample of customers or products and monitor results closely. Adjust your tactics based on data, not anecdotes and hunches.
Circumstances and your markets have been changing for the past month, and they will continue to change as we come out of the Covid-19 crisis. Rigorously planning how to adjust to those changes will improve your profitability.