When we talk about consumers and their propensity to spend, we have a tendency to label those who prioritize price in their decisions as "Price-Sensitive." While this is largely budget-driven, there is a growing and significant swath of customers that demonstrate this behavior with a very different motivation -- which means they deserve a different label. I would argue that these differently motivated people are not "Price-Sensitive," but rather "Price-Sensible."
When someone is Price-Sensitive, it means they're on a tight budget. They're looking for a good deal because it's absolutely necessary. When someone is Price-Sensible, on the other hand, they have money and are happy to spend it, but they don't want to waste it. Price-Sensibles are smart shoppers, and are willing to invest time and effort toward good purchasing decisions. Once they've found retail destinations where the smart sourcing has been done for them (like Costco or Amazon), they trust them, return to them, and advocate for them.
Once upon a time, there was a stigma associated with this approach (True story: I used to be embarrassed to send gifts from Costco.com). However, there has been a noticeable shift within recent years and, today, being frugal is sort of cool, much like being a geek has evolved into its own hipness. It's a way to feel "in the know," as though you're getting away with something that everyone else is missing.
People love to brag about getting a good deal and, since price comparisons are incredibly easy to do in today's world, a customer will feel dumb for paying more than their peers for the exact same product. For instance, a recent survey from the National Association of Convenience Stores reports that 64 percent of consumers would happily drive out of their way to save on gas. Signs for gas prices are really prominent, so it's easy to feel down on yourself for overpaying. It's hard not to become price sensible when conversations frequently revolve around costs for commodities (mobile phone service, hotel rooms, whatever's the hottest gift is for the holiday season). People realize that they have a choice and they're increasingly choosing the smarter and better deal. After all, if you can pay a lower price without sacrificing anything, why wouldn't you?
As a compulsive (and now very proud!) Costco shopper, I totally get the Price-Sensible trend. This shift has been fueled by the online economy, as well as by the increasing transparency of alternatives and pricing. Even for brands that sell on their quality and value-add, price is becoming more important, and lower pricing is becoming trendy -- especially since it's easy to communicate to customers where the price cuts came from and show that quality hasn't suffered.
If you're looking for your company to cut costs and become more desirable for the Price-Sensitive consumer, here are a few tips:
1. Cut Out The Middleman
There's been a surge, particularly in the fashion industry, of Direct-To-Consumer (D2C) companies. Brands like Warby Parker, Everlane, DSTLD and Cuyana began as online-only operations. Although there was a time when online-only was correlated with lower quality to drive the lower cost, these brands disrupted that pattern by focusing on quality of design, materials and user experience. In turn, the old D2C perception was flipped upside down.
2. Put Your Cost of Goods Sold (CoGS) On A Diet
This may seem like an overly simple solution, but sometimes taking the most basic precautions can result in huge increases in cost-effectiveness. Maximize focus on operational efficiencies. Optimize internal processes to ensure purchasing is done by an expert. Check and double check that supply chain management is streamlined as much as possible. By "trimming the fat" in your CoGS, you'll know you're in the best position possible to lower your price points.
3. Get Creative With The Way You Sell
Acquiring a new customer is expensive, but retaining them is significantly less costly. As the Lifetime Value (LTV) of a customer increases (based on the length and frequency of the customer's use of your product), the ratio cost of the Cost Per Action (CPA) goes down. This savings can easily be passed on to customers in ways like retention bonuses, discounts, or hardware subsidizing (as with cell phones). Many companies either lock in a customer with contracts or make it exceedingly simple to reorder with auto-pay setup, but companies like Costco have essentially paid their "retention bonus" upfront by offering customers a lower price by buying at volume at the get-go.
When your customers feel smart for using your product, it's an important connection. Why not do everything you can to offer a price point that makes them feel even smarter?