Many companies have no control over the final price presented to the customer. So, when measuring customer price sensitivity, what should be done with elements that are added to the price after the manufacturer or service-provider relinquishes control of the product or service? Simple…don’t worry about what you can’t control.
In this post we describe several common scenarios in which a company may not have complete control over the price presented to the customer and how to address them when making pricing decisions.
Taxes: In many cases tax is a mandatory part of the final sale price, so customers already expect and understand that and have factored it into their purchasing decision. Since measuring customer price sensitivity before tax yields generally the same result as measuring with tax, and the tax rate is likely the same for your competitors as well, it is best practice to make pricing decisions based on pre-tax data and let the customer worry about the rest at the end of the sale.
Re-seller Markups: Both business-to-business (B2B) and business-to-consumer (B2C) customers often face the dilemma of not owning the relationship with the end customer. In these situations, it’s essential to re-define the customer to be the entity purchasing the product from you–the reseller or retailer. Measuring customer price sensitivity of your customer will net the best insight (and least amount of noise in your model).
Sales Commissions: The best practice for measuring customer price sensitivity when sales commissions are part of the pricing decision depends on whether you have internal sales executives that you pay on commission or you partner with third party agents who add a markup to the final price when presenting to the customer. In the case of an internal sales team where their commissions affect only the realized margin and not the final price, measuring customer price sensitivity on margin as opposed to price can be a viable option. This is especially true if your cost structure is fixed or highly-regulated (again, manage and measure what you can control). In the case, however, of an external sales team where a third-party agent owns the customer relationship and marks-up the price to include a commission, it is best to treat the agent as your customer and measure price sensitivity of your agent, not the agent’s customer.
In the end, the best data-driven pricing insights are those based on decisions within your control.