When we think about the role of price in a customer’s purchase decision, we most often picture a binary “buy” versus “don’t buy” purchase outcome. This view of the customer mindset is highly valid, and quantifying this impact is enough for many organizations to unlock significant growth opportunities through more targeted pricing strategies. But for those organizations further down the path in developing sophisticated Revenue Management capabilities, there is often a third purchase outcome to bring into the equation.
For many industries, the true customer purchase decision actually contains three purchase decisions – “buy”, “don’t buy”, and “buy something else”. The third outcome, “buy something else”, is more difficult to pinpoint than the first two, but successfully quantifying and acting upon that information can unlock another layer of profitable growth opportunities.
To explore the “buy something else” purchase decision further, this third outcome typically plays out in one of two fashions:
- The customer “buys something else”…but not from you
In this case, the impact to your company is essentially the same as the “buy” versus “don’t buy” purchase outcome; you either win the sale or the customer takes their business elsewhere. There are methods by which this lost demand can be estimated and acted upon, but let’s focus on scenario #2 below for the time being.
- The customer “buys something else”…from you
In this situation, the customer does not buy the originally intended product/service, but rather than taking their business elsewhere they buy something else from you instead. Though these situations may appear to be “lost” sales when observing the originally intended product/service, a sale was still made. So, the question is, are you better or worse off as a result of this customer tradeoff? Is there anything you can do about it?
Two critical components of the customer purchase decision must be identified and adequately measured before you can act.
- First, you must identify the subsets of products/services among which a customer is willing to tradeoff
- Second, you must quantify the impact price has on the identified tradeoff behavior
A number of Revenue Management modeling methods exist to help you identify substitutable products/services and understand how the price difference between them impacts which one the customer ultimately buys. Armed with this knowledge, you can strategically set prices between substitutable products/services to guide customers’ purchase decisions towards what you most prefer to sell.