One of the most important, albeit difficult, decisions of an association executive is determining price. Even a small difference can result in substantively more (or less) revenue and sales.
This post reviews these 9 concepts on price sensitivity and briefly outlines how Association Laboratory applies each to common association programs and services.
- Unique Value Effect: How unique is the product? (Buyers have less price sensitivity if the product is unique.)
Many associations offer a wide variety of programs and services. Some are distinct in the marketplace, others are more commonplace. By determining to what extent your products and services are unique, you can begin to determine whether or not the market will respond to changes in price.
For example, if your credential is one of many credentials in the marketplace, potential buyers will be more price sensitive as they compare you to alternatives.
- Substitute Awareness Effect: What is the availability of substitute products? (Buyers have less price sensitivity if they are not aware of or if there are few substitutes.)
In today’s media driven world, it is much easier for members to identify alternative products and compare features and price.
As the member’s awareness and knowledge of their choices increases, their price sensitivity increases. Thus, for major strategic product or services that generate the lion’s share of the association’s revenue it is important to identify and monitor competitors to ensure pricing strategy takes these organizations into account.
- Difficult Comparison Effect: How easy is it for customers to compare products? (Buyers have less price sensitivity if they cannot easily compare products.)
Comparing one conference to another is a comparison of similar products but comparing a conference to a webinar compares different products. Both, though, may solve an educational need.
Social media and the internet make product comparisons much easier. This has shifted power to the customer and created an imperative for associations to understand the pricing of competitors.
- Total Expenditure Effect: What is the total expenditure necessary to purchase the product relative to their total income? (Buyers have less price sensitivity when the total expenditure is low relative to total income.)
As a dues amount increases as a percentage of their total income, the more price sensitive the member becomes. For example, a dietary manager may pay $125 in dues, and an oncologist may pay $125 in dues, but the percentage for the dietary manager of their total income is much higher. Dues as percentage of average income of the member increases price sensitivity.
- End Benefit Effect: What is the total expenditure necessary to purchase the product relative to the total cost of the end product? (Buyers have less price sensitivity when the total expenditure is low relative to total cost of the end product.)
Consider registration costs compared to the total cost of convention attendance. If registration is low, relative to the total cost (travel, hotel, etc.) attendees may be less price sensitive to the registration fee. This does not mean that they will not consider other factors (housing, travel, etc.). But as an association bundles more and more activities into the registration price (thus increasing it as a percentage of the total) attendees become more sensitive to the amount.
- Shared Cost Effect: To what extent is the cost of the product shared with other buyers? (Buyers have less price sensitivity when the total expenditure is shared.)
When someone attends a conference, the registration amount is a singular expenditure while hotel, through shared rooms, might be a joint expenditure. This results in increased sensitivity to the registration price as opposed to the hotel room rate. In addition, while groups rates may lower the cost for a room, this would not impact price sensitivity, generally speaking, because the attendee simply looks at the price to be paid.
- Sunk Cost Effect: To what extent is this product used in conjunction with something already purchased? (Buyers have less price sensitivity when the product is used in conjunction with a previously purchased product.)
Membership involves an investment in the association. Once they have made this initial purchase, members become less sensitive to the price of other association services. This results in improved sales to members vs. nonmembers.
- Price Quality Effect: What is the perceived quality, prestige or exclusiveness of the product? (Buyers have less price sensitivity when the product is assumed to be prestigious, exclusive, or to have particularly high quality.)
Many associations communicate the “premium” nature of their association. If this message is successfully delivered through programs and services, members are less price sensitive to changes in dues or product price. If unsuccessful, it potentially generates dissatisfaction with the association because the promise does not equal the reality.
- Inventory Effect: Can the customer store the product or keep it in inventory? (Buyers have less price sensitivity when the product cannot be stored.)
Some association products are more perishable (conferences) while others are less perishable (books). In addition, some benefits of membership must be maintained, for example, a credential requiring annual contact hours.
As the perishability increases, the more price sensitive the member or customer becomes.
A good exercise for associations is to identify a primary strategic product and have an internal discussion on each of these factors related to the marketing and delivery of the product.
In addition, choice modeling research techniques can be used to identify the price sensitivity of members and specifically determine a price that maximizes sales and revenue for the association.
Determining the pricing “sweet spot” can build long-term revenues and increased member satisfaction over time.
In summary, price sensitivity is an essential component of marketing and requires the association to understand competition, understand how members and customers purchase a product, and understand the uniqueness of the product in the marketplace.