Using a Price Sensitivity Analysis with Your Pricing Strategy

Using a Price Sensitivity Analysis with Your Pricing Strategy

Most manufacturers and distributors are accustomed to applying prices to products, especially if they are made-to-stock items. However, if you are not factoring the price sensitivity of each customer at the time of the transaction, you are likely leaving money on the table and losing sales.

Every customer is different, even if they are in the same industry selling the same products. Recognizing these differences and factoring them into your pricing can pay big dividends. Consider these five key price sensitivity factors when quoting your customers or sales prospects. Including these in your pricing decisions will help you close more deals and send more money to the bottom line.

Price Sensitivity Factors

  • Customer Size – Large customers have buying power. They have the volume to negotiate for the best prices in the industry. Recognize their buying power and adjust your prices accordingly. Small customers have little buying power and are typically willing to pay higher prices. Carefully analyze your smaller customers’ price points. While customer size factoring seems obvious, we constantly see small customers getting low prices. Most firms are careful about pricing large customers but tend to ignore small customers, where, in fact, two margin points or more can be captured.
  • Incumbent Supplier – Are you an incumbent supplier to this customer? Depending on the cost and risk of changing suppliers, you may have the opportunity to capture slightly more price. Our research has shown that the incumbent supplier can have as much as 2% – 10% more pricing power with existing customers.
  • Economic Impact – What is the economic impact of your product on this customer? Calculate and communicate the economic benefits to this customer. How does your product help the customer increase revenue, reduce costs, reduce risks or improve competitive advantage? If your product has a high economic impact, be sure to reflect it in your price.
  • Delivery Needs – Sales representatives for a manufacturer of fasteners are trained to ask every sales prospect about the required delivery schedule before prices are quoted. Orders needing delivery within 48 hours are automatically priced 20% higher than other orders. The company is in a unique position due to its production capabilities to deliver more quickly than its competitors. Don’t create price leaks by agreeing to expedited delivery at regular price levels.
  • Customer’s Cost Structure – Is your product a significant percentage of the customer’s cost structure or is it barely on the radar screen? Low percentage products are candidates for higher pricing. A specialty fastener for a $1 million piece of production machinery is barely noticed compared to the same fastener on a $5 component. The same fastener may be sold to a variety of customers and have significantly different price points.

Considering each of these factors for each customer will help close more sales and improve profit margins.

PricePoint Partners helps manufacturers and distributors achieve price optimization by applying tools and analysis to gauge price sensitivity across customers, products and markets. Call us today at 330-958-4036.

About the Author

Ralph Zuponcic

President, PricePoint Partners

Ralph is a national authority on strategic pricing. He has been featured in publications including The Wall Street Journal, Fortune Small Business, CFO Magazine and Marketing News.

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