Price Sensitivity In Social Enterprise
I was recently in one of those “All Books Are $10” stores in the city, and had a look around.
I’m wary of them, because I’ve bought 3-4 books there before and either didn’t finish or enjoy each of them.
A few titles I recognised – they were books I’d considered buying back in 2015 but wasn’t fully sold on.
That was at $29.95, but now they were $10.
You know what I did?
I walked out and went about my day.
But then it dawned on me how irrational this was.
If I was 50/50 at $29.95, why wouldn’t I jump at $10?
Surely this was a great deal?
Unfortunately, that’s not how price sensitivity works.
Price is a complex subject, and one that often makes or breaks a business.
It seems to defy logic – the rules are vague and inconsistent.
But the fact remains, a price tag can often change our mind about a product, for better or worse.
Some of our purchases are Price Sensitive – a small change in price leads to a big change in our behaviour.
Petrol is a great example; most people will switch to a new service station if it’s prices are 3c cheaper than the competition.
Flights are similar, we’ll often choose our travel arrangements based on which ones are cheapest, even if it means an extra stop on the way.
Same with travel insurance – we’ll happily choose to go with an unknown brand if it’s $4 cheaper than the major players.
Other purchases are not price sensitive at all – like when we go to buy designer clothes, single malt scotch, cigarettes or coffee.
We might grumble about price increases, but our desire for each of the above can’t be shaken by an extra few dollars.
So why didn’t I buy the books?
Because books have two price tags – money and time.
The money might have been discounted, but I wasn’t sold that the book was worth the 6-8 hours.
And worse still, the fact that it was in a discount outlet suggests that this isn’t exactly a classic.
We’re price sensitive when we buy functional products and services – things that tick a box.
These feel binary, we either have them or we don’t.
Petrol is petrol.
Flights are flights.
Insurance is insurance.
There’s no real difference between brands, so why pay more?
Once we start to see differences between competitors, we tell ourselves a story about how the higher quality option will increase our quality of life.
In other words, paying a bit more to get a much nicer experience.
Johnnie Walker Blue Label might not be the best value, but it’s the one with the highest status…
Cigarettes might be awful for you, but they satisfy your cravings like nothing else…
Christian Louboutin shoes aren’t good value, but you never had daydreams about Joanne Mercer…
That’s why we’re happy to overpay for some things, and become miserly over others.
Which one of these best describes your industry?
Which category do your customers put you in?
When customers are price sensitive, it’s worth leading with a discount.
In fact, many brands have made names for themselves by Being The Cheapest in clever ways.
Sometimes a discount helps win the sale, other times throwing a bonus has a better effect.
It depends on whether your customer is motivated by the lowest dollar figure (e.g. 40% off) or by the best value for money (e.g. buy one, get one free)
Stores like Bunnings Warehouse and Dan Murphy’s do this well, ensuring customers that they are definitively the cheapest through their price-beating guarantees.
When customers are quality sensitive, it’s worth restating your credentials.
Brands have a number of ways they establish themselves as Being The Best, such as through their heritage, packaging, storytelling or their functional superiority.
In these circumstances, discounts are suspicious.
Have you ever seen an ad for a Ferrari sale?
If your product is that good, and your customer has an eye for quality, then discounts become unhelpful.
It’s why brands like Apple and Tesla chose not to advertise sales, but instead double down on demonstrating their dominance over their competitors.
It seems that social entrepreneurs tend to get this wrong.
They see their competitive advantage is that they have social impact – often in the form of a story about what they’re able to achieve.
The problem is this doesn’t satisfy either type of customer.
The price sensitive customer will follow the brand on twitter, then continue to buy from the cheaper alternatives.
The quality sensitive customer will share your TED talk, but then continue to buy from your upmarket competitors.
That leaves the mystical “Story Sensitive” customer, who makes a decision based on the narrative.
These people are very rare, and easily satisfied.
Once they’ve bought from you and heard the story, how do you win a repeat purchase?
The answer is generally: By being Better or Cheaper.
For social enterprise cafes, the story gets them in the door, the quality of the coffee determines if there’ll be a repeat business.
For social enterprise cleaning/waste removal companies, the story gets a foot in the door, but the price needs to be comparable to the rest of the market.
If your customer is price sensitive, have a think about how you can communicate why you’re good value.
If your customer is quality sensitive, have a think about how you can highlight what makes you superior to the competition.