Sunday, September 26, 2010

Taking advantage of price sensitivity

There was this university that I attended where there was only one convenience store in the whole campus. I remember on and off hearing some of my friends talk about how the stuff in the convenience store is expensive and that you can buy a can of Coke or whatever for less outside.

While it might not have been a great situation for the students or the consumers, it was a golden opportunity for the convenience store to take advantage of the low price sensitivity of the students for its products (thanks at least in part to the monopoly like control of the convenience store on M&M’s and etc) and reap for itself greater profits, assuming of course that it has a cost structure in line with the average convenience store and that it is run competently. Nobody likes paying less for a can of Coke more than I do, but if there is only one outlet selling Coke, I don’t really mind paying the extra premium the outlet might be charging, I need to get my Coke fix!

Whether taking advantage of customers' low price sensitivity by raising prices and increasing the profit margin, or taking advantage of customers' high price sensitivity by lowering prices and taking market share, business owners can put themselves in positions to enjoy really good profits by understanding their customers’ price sensitivity for their products,

Say a grocery store only sells candy bars, and it sells each candy bar for a dollar making 10 cents of profit for itself. After conducting some research, the owner of the grocery store decides that his customers wouldn’t mind paying 1.20 for a candy bar; he increases the price, and he finds out that his research was right on the mark. The grocery store has tripled its profit simply by understanding and taking advantage of its customers’ price sensitivity.

Entrepreneurs striving to build their company’s brand should look at the big picture before deciding whether or not to take advantage of certain price sensitivity related opportunities that might present themselves. Exploiting certain price sensitivity related opportunities might result in an increase in profits for the short-term, but it can affect the reputation of your brand, which can impair the long-term profitability of your company.

If you have anything that you would like to share, or if you have any questions, please feel free to comment. Thank you for reading, and may you always sustain good returns on your portfolio.