What drives price sensitivity in your customers?

Price sensitivity is an important consideration in market positioning strategies. This topic involves basic economic concepts of supply and demand; when the price goes up, customers purchase less of your product. Let’s look at what determines how sensitive customers are to price changes.

A related concept is price elasticity of demand, or demand elasticity (DE). This is a measurement of how quickly demand changes as the price changes. This is measured with the amount of volume change relative to price change. DE is commonly measured based on a scale of 0 and 2. A value of 0 (price inelastic) suggests that there will be no change in demand, relative to price changes. A value of 1 is the optimization point, where the quantity change is proportionate to price change. A measurement of 2 (price elastic) suggests that customer response to price changes is volatile.

Factors that determine price sensitivity:
• The number of substitute products available (perceived by the customer)
• The higher % of the personal or corporate disposable or total income
• The more necessary the product is perceived to be
• Brand attachment
• The amount of time a product’s price increase is escalated, providing consumers with an opportunity to research alternatives

Examples:
– Products with a very low DE include salt, eggs or cigarettes. With salt, the product is very inexpensive in terms of personal income, and creates a lot of value relative to the price of usage. Eggs are a basic protein source, which typically remain fairly inelastic, but still has substitutes. Cigarettes are based on addiction, hence big tobacco has been able to increase prices over the last 40 years about 25x. A single cigarette now costs what a pack did.
– Products that are highly elastic usually have many substitutes, or represent a large percentage of total income. This includes products specifics brand of soup, chocolate bars or sports cars. When consumers can easily change brands or choose to defer the purchase, purchase behaviour follows.

It’s worth considering what factors drive sensitivity in your market, and whether you can impact them to decrease perceived substitutes, and whether your pricing is optimized in terms of maximizing sales volume relative to demand.

Why is strategy management is so important?

Building a winning strategy is what executives often think of as being the greatest challenge in leading organizations to victory. A larger challenge than that is to sustain that focus throughout the organization, all year long, bringing it to life. Therefore, strategy management is a much broader topic than formulation or communication alone. It begins with creating a compelling story about the future, but it requires a purposeful and ongoing process to aligning all of your teams … all of the time.

Why is this so important? Doing this well allows you to:

1. Develop a clearer picture of what you’re working to accomplish … so that your people understand HOW you’re going to create an advantage over your competitors
2. It allows you to: Translate your strategy into divisional terms … so that all teams understand their role in making it successful
3. Finally, it allows you to: Monitor, learn and adapt … Using a balanced scorecard and both team and personal accountability frameworks … to provide you with feedback on all parts of the business, and hold everyone accountable for results.

At times, stopping to talk about strategy at an operational level seems like a distraction from something that is more pressing, however, there is one reason why I’m drawing your attention to this issue: 90% of organizations fail to achieve what is described in their business plan, instead delivering an average only 63% of the promised financial results! The reason for this is a lack of the ability to execute strategy, which, not incredibly is the reason why 70% of CEO failures occur.

The root cause of these challenges isn’t as complex as you’d think. On average: “one in 20 employees understands the company’s strategy, more than half of organizations do not link budgets and strategy, and the vast majority of executive teams spend less than one hour per month discussing strategy.”

As the prominent British scientist, Lord Kelvin, stated a century ago : “I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind. If you can not measure it, you can not improve it.”

By implementing just a few changes to your business planning processes, you’ll increase your ability to differentiate, which is all about leaving a lasting impression with customers about why you’re better than your competitors.

Maintaining a Clear Competitive Strategy

Porter (1996) stated, “The essence of strategy is choosing to perform activities differently than rivals do” (p. 96). Value disciplines are the fundamental competitive strategies and operational models that firms use to differentiate within a market. By giving definition and clarity to the form of differentiating value, organizations are enabled to easily align their operations in order to create value for customers. The three forms of customer value include having the best price, best product, and customer intimacy (Treacy & Wiersema, 1993). Treacy (1995) later wrote, “To deliver this kind of unmatched value … you have to back it up with an unmatched way of operating your business” (p. 195). After strategy selection, the extent to which operations are aligned with delivering a chosen strategy determines how successful the organization can be at creating that form of value. For example, supply chain efficiency is the singular focus to organizations such as Walmart, whereas constant reinvention and a total focus on innovation is critical to Apple. According to Treacy and Wiersema (1993), “Companies that push the boundaries of one value discipline while meeting industry standards in the other two gain such a lead that competitors find it hard to catch up” (p. 85).

Does your organization hold the line on two, and clearly differentiate on one? When your customers can tell you that, unaided, you’ll know your strategy is working.