Are you showing enough sensitivity to your pricing in this economy?

Thrifty Gas Prices in San Pedro
Thrifty Gas Prices in San Pedro (Photo credit: Wikipedia)

The other day I spotted a new Portuguese restaurant next to a boutique hotel. I wondered what the food was like and the prices. Next time I was in the area I went inside and got hold of the menu. I was shocked at the prices.

To give you an idea, the quarter chicken was priced at R63. That’s 233% higher than what you’d find in a reasonable priced restaurant. Another product that easy to compay: fishcakes. They were selling for R48, which was 160% higher than any reasonably priced restaurant.

We won’t ever be eating at that restaurant.

Price sensitivity in the recession is focused on frequently purchased product categories. This could be water, coffee, everyday beverages, comfort foods, bacon and snack bars. Air fresheners are very price sensitive. These price sensitive items tend to have higher prices per unit and there are longer times between purchases.

How do you determine your prices? Are you turning customers away?

Research also shows that people tend to save money on pricey purchases such as restaurant dining so that they can afford what is called “affordable luxuries”. These are discretionary purchases such as video games, gadgets, kitchen appliances and so on. Consumers go for everyday bargains to hold down their overall spending and free money for more expensive purchases, according to a report.

Some small business owners are sensitive to their pricing. For example, a computer shop owner I know prices consumables slightly above discount chains stores. But he stocks a slightly lower priced alternative computer consumable for highly price sensitive customers in his local area.

Loss-leader pricing gets feet in the door. You know, compost in spring for gardeners in nurseries. You collect your compost and by the time you get to the cash register or check out you have added a few more items to your trolley.

The worse kind of pricing I see is dog lines particularly in the hard goods area. Small business owners are saddled with stock that won’t move and then because it’s been standing in the store so long they up the price. The product just continues to sit. In cases like this you can’t recover sunk costs. Better to slash the price and get it off your floor as soon as possible.

Some research done on frequently purchased product categories shows that consumers within each segment may have different motivations for making purchases and may respond differently to price changes. The conventional wisdom is that loyal customers are price insensitive while non-loyals are sensitive to price changes when making purchase decisions in the frequently purchased product categories (Journal of Marketing Theory and Practice, volume 19, number 3 (Summer 2011). But new research shows that there are at least two consumer groups within each segment. Each group shows a different level of price sensitivity. The researchers conclude: marketing activities targeting the value-conscious loyal consumers should focus on enhancing the value-creating features of the products/services while those serving the deal-prone loyals should include monetary incentives.

In a nutshell, what this means is that all customers want you to show them more value (perhaps a free service now and again) and non-loyal customers want a discount. But you have to be careful because some variety-seeking non-loyals may not be interested. As the researchers say, “… the 20% discount may not be as effective in attracting new customers – especially those variety-seeking non-loyals – as a better shopping experience or a more extensive product line.”

Wrong pricing that ignores purchasing sensitivity can turn potential customers away. Correct pricing that matches your customer profile and motivations can reel them in.

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