We pricing people often use the phrase Willingness to Pay. The profit maximizing price for any customer is to charge what they are willing to pay. We also frequently use the phrase price sensitivity. They feel like the same thing, but they really aren’t.
Willingness to pay is a number (theoretically). It’s the most money a buyer will exchange for your product. Price sensitivity is a characteristic of a buyer. We consider buyers with a low WTP to be price sensitive. However, price sensitivity can mean more than a low willingness to pay.
Price sensitive buyers may be willing to pay a high price, they don’t want to. Well, nobody wants to pay a higher price, but price sensitive buyers do something about it.
They wait: Price sensitive buyers are willing to wait for a better price. They wait for an item to go on sale. They wait for a better deal. They wait and watch.
They shop around: Price sensitive buyers are willing to shop more. They compare lots of brands. They search several retailers. They scour the Internet. Price sensitive buyers will do their best to find a lower price before buying. To them, the time and effort is worth it.
They use coupons: Price sensitive buyers often use coupons. Using a coupon requires effort. To use a paper coupon the buyer needs to find the coupon, clip it out, store it in a handy place, remember to go to the right store, choose the right item, and get out the coupon at the cash register. This is a lot of effort price sensitive buyers are willing to exert for a better price. Digital coupons take less effort, but they still require effort.
They don’t buy: As stated above, price sensitive buyers may have a lower WTP. When the price is higher than their WTP, price sensitive buyers don’t buy.
As businesspeople, we often think about our buyers’ WTP (or at least we should). We should also think about the actions select buyers are willing take so they can pay less than their WTP. We should create strategies to address these. You may want to treat these price sensitive buyers as a separate segment. The key is to win price sensitive buyers without giving lower prices to people who are not price sensitive.
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