How to Influence your customers’ price sensitivity?

Do you believe all your customers pay attention to price to the same degree? You probably said no — and you’re right. Not only are there differences in price sensitivity among customer segments, but even buyers within the same segment can show different levels of pain at the moment of paying. Some of the reasons that explain these differences in price sensitivity include the amount of the purchase relative to the customer’s income, the share of the cost the customer pays directly, the context of the purchase, and how important the purchase is for obtaining an economic benefit.

Manipulate your customers’ price sensitivity
But did you know you can influence your customers’ level of price sensitivity? Perhaps this time your “yes” was less certain — but if you answered yes, again, you’re right. Depending on the company’s interests, it is possible to increase or decrease the importance a customer assigns to price during a purchase decision. If the company’s strategy is to sell at lower prices than the competition, it will want to maximize the price sensitivity of its target customers. If, on the contrary, the company competes through differentiation by selling its offers at prices higher than the market average, it will want its customers to pay little attention to price when buying.

The difficult comparison effect
One of the most powerful ways to manipulate customers’ price sensitivity, in both consumer and industrial markets, is by making your offers more or less comparable to those of the competition. In pricing strategy, this phenomenon is known as the difficult comparison effect, which states that the harder it is for a buyer to compare prices across two or more offers, the less sensitive they will be to the price of those offers. This effect has multiple applications depending on the company’s positioning and the market involved.

The first application appears when a company sells its products or services at higher prices than competitors and does not want this to be too obvious at the moment of purchase. In other words, the company wants to appear cheaper than it really is. This is exactly what Kellogg’s does with its boxed corn flakes. On a supermarket shelf, you might see a large Kellogg’s box next to a similar-sized box from Nestlé. Although the Kellogg’s product is actually 16% more expensive than Nestlé’s, the price per box is 20% lower. How? Even though both boxes are the same size, the Kellogg’s box contains 350 g, while the Nestlé box contains 500 g. Obviously, this works only when most customers don’t notice the difference in content.

Increasing customers’ price sensitivity
The second application works in the opposite direction. When a company wants to position its products or services as low-priced, it wants customers to notice and believe there is no difference between its product and the category leader. In other words, the company wants to increase customers’ price sensitivity as much as possible, aiming for the purchase decision to depend almost exclusively on price. Chap Ice lip balm alludes to the market leader ChapStick but ensures that its prices remain well below the leader's. With a similar brand and packaging, Oral Labs (manufacturer of Chap Ice) is essentially saying: “Buy me — I’m the same as ChapStick, but much cheaper.”

Reducing customers’ price sensitivity
Finally, there is a useful application of the difficult comparison effect for making a price increase less evident, thereby reducing customers’ price sensitivity. Sometimes a company must raise prices due to increased costs. The main risk is that customers reject the new price and switch to competitors. In these cases, the best tactic is to change the product’s presentation by reducing the content so that the price per package remains the same or decreases. The goal is to make it difficult to compare the new price with the old one.

In summary...
It is essential not only to understand the differences in price sensitivity among customers in your market, but also to manipulate their pain of payment depending on your company’s interests and positioning. If you sell low-priced products or services, you will want to increase how much your target customers care about price. If, on the other hand, you do not have a cost advantage and your offers are priced above the competition, you will want your customers to have low price sensitivity. The difficult comparison effect is an excellent tool to achieve this.