How well do your salespeople know their customers? No, I’m not talking about knowing basic customer information or buying habits. Rather, I’m talking about knowing how each customer will react to price changes for each product or service he or she currently consumes. It’s about listening and constantly probing to find the answer to one very important pricing question.
If prices were raised today, how would your customers react?
The simple answer is that it all depends on how price sensitive (or insensitive) your customers are for specific products or services. For customers who are relatively price insensitive, then the answer is that volumes would remain pretty much unchanged whether you raise or lower prices. This is important information for any pricing team to consider when analyzing the effects of a potential price increase or decrease. Do you know which products or services represent the most price-insensitive offerings, and do you have that information at your fingertips? If not, then you should.
It gets a little sticky for those customers who are relatively price sensitive. For a price hike, the real question to ask here is not whether you will see a volume decrease (as predicted by a normal downward-sloping price demand curve), but whether the price hike will force the customer to change suppliers (because of the cross elasticity of demand). 1 If a supplier change occurs, you’re out—and one of your competitors is in!
The difference between these two scenarios (sales volume dropping somewhat as opposed to sales volume dropping all the way to zero) is huge! Does your sales force know its customer base well enough to be able to gauge their reaction? It should because again, this is one of the most valuable pieces of information that needs to be brought into any serious price strategy discussion—a discussion you should be having with your sales force right now.
The challenge with answering this question is that it requires time—time for your sales force to not just get to know the buying habits of each customer, but the extra time needed to probe. It’s all about asking questions about how customers might react to price changes that are initiated by both you and direct competitors. Remember that these questions will allow you to either directly or indirectly ascertain the overall price sensitivity of each customer, along with the price sensitivities to each offered product or service. It is also crucial to gather enough information to predict within reasonable certainly which customers would change suppliers. Only when these issues are faced head-on and addressed can you ensure that you will not be blindsided by an exodus of customers in the face of a supply shakeup or other unforeseen (or seen but unaddressed) calamity.
Again, the process takes time and can’t be rushed. So if you’re thinking about adjusting prices later this year, you need to look down the line and ensure your sales force is well on its way to gathering this information today.
1. Cross-elasticity of demand is the proportionate change in the demand for one item in response to a change in the price of another item. It is ‘positive’ where the two items are mutual substitutes, and any increase in the price of one will increase the demand for the other. It is ‘negative’ when the items are complementary and any increase in the price of one will decrease the demand for the other.
