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 they currently pay for. 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 their specific products or services. For customers who are relatively price-insensitive, then the answer is that volumes would remain pretty much unchanged with most all of the price change flowing to top line revenue growth.
It gets a little sticky for 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 cross elasticity of demand). If a supplier change occurs, you’re out and one of your competitors is in!
The difference between these two scenarios (sales volume drop as opposed to sales volume going to zero) is huge! Does your salesforce know their customer base well enough to be able to gauge their reaction? They should, because this is one of the most valuable pieces of information that needs to be brought to any serious price strategy discussion.
The challenge with answering this question is that it requires time. Time for your salesforce to not just get to know the buying habits of each customer, but extra time to probe. Asking questions about how customers might react to price changes from both you and your direct competitors. Questions that 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. And gathering enough information to predict within reasonable certainly which customers would change suppliers. Again, the process takes time and it can’t be rushed. So if your thinking about adjusting prices in 2012, you need the salesforce to be well on their way to gathering this information today.
Here’s the takeaway: Does your sales force know their customer base well enough to be able to predict their reaction to price changes? If not, what are you waiting for?
