Joanna Wells explores how price-sensitive customers are changing the pricing landscape as businesses face rising costs, tighter margins and pressure to raise prices. The episode examines why following competitors with blanket price increases can backfire.
Using Walmart, DuluxGroup, Grainger and Zoro as examples, the episode looks at how businesses can use pricing structure and value-based pricing to serve price-sensitive customers without giving away margin.
TIME-STAMPED NOTES:
[00:00] Price-Sensitive Customers Are Changing the Pricing Landscape
[02:19] How Price-Sensitive Customers Are Changing the Market
[03:12] Walmart’s Strategy for Price-Sensitive Customers
[05:29] How to Respond to Price-Sensitive Customers Pushing Back on Price
[06:05] Using Pricing Structure to Serve Price-Sensitive Customers
[07:23] Grainger and Zoro: Creating Options for Price-Sensitive Customers
[11:47] Conclusion: Three Questions to Ask About Price-Sensitive Customers
Price-Sensitive Customers Are Changing the Pricing Landscape
00:00 Your customers are more price-sensitive than they were three months ago. Your costs are higher, and 80% of your customers are about to raise prices at the same time as you. This is not going to go the way you think it is, and here’s why.
00:19 Philadelphia Federal Reserve released its August manufacturing business outlook survey this week. They asked manufacturers specifically about pricing, and 37% said that their core customers have become more price-sensitive since last quarter. At the same time, 41% are still reporting higher input prices, and of those expecting near-term cost changes in their industry, 80% expect their competitors to raise prices in response. The median expectation? Those increases will hit the market within four months.
00:57 The RBA also published its August statement on monetary policy this month based on conversations with around 240 Australian businesses between May and early August. The finding: businesses continue to report elevated cost inflation, but customer price sensitivity is constraining pass-through to selling prices.
01:20 The Fair Work Commission raised award wages 4.75% in June, higher than most businesses expected. Fuel and logistics costs remain above pre-conflict levels, and the RBA says businesses now expect prices to grow by less than costs. Their word for it: modest margin compression.
01:44 Two countries, two central bank data sets, the same problem. Your customers want lower prices, your costs want higher ones, your margin is stuck in the middle. The question is, what are you going to do about it?
02:04 So, I just want to go back to that 80% number. If you’re thinking what most manufacturers are thinking, if everyone raises together, customers have nowhere cheaper to go and the increase holds. I just want to challenge that assumption.
How Price-Sensitive Customers Are Changing the Market
02:19 Following the herd in pricing is really not a strategy, it’s the lack of one. It’s a reaction. Because the same survey told us that 37% of manufacturers are seeing customers become more price-sensitive. Your buyers are becoming more discerning at the exact moment most of your competitors plan to charge them more. That does not produce an orderly market adjustment. It produces a segmentation event. Some customers will absorb the increase, some will start looking for alternatives, and some will find them. Have you looked at which of your customers are in which camp? Not as a general trend, specifically by segment, by account. If you’re treating this as a blanket market movement, you will see the answer in your order volume three months from now.
See whether your pricing is under controlWalmart’s Strategy for Price-Sensitive Customers
03:12 Now, I just want to turn your attention to Walmart, because what they’re doing now is fascinating. So, just to give you a little bit of background, the US imposed tariffs on Chinese imports. Walmart, as one of the largest importers of Chinese goods in the world, paid them on billions of dollars of product. So, when tariff exclusions were later granted on certain product categories as part of this US-China trade negotiations process, businesses that had already paid were entitled to refunds through US Customs. Now, Walmart received 2.9 billion back. That’s a legitimate government process available to any US importer, but the scale is extraordinary because Walmart’s import volume is extraordinary.
04:04 Now, they had a choice about what to do with that money, protect the margin or return it to shareholders, or just sit on it. But instead, what did they do? Walmart is using it now, right now, to lower prices on about 11,000 products. Not everywhere, on 11,000 specific products where a price investment will create growth. And at the same time, they are gaining share among households earning over, say, $100,000 a year, and they’re growing e-commerce very strongly.
04:44 Walmart is not asking whether customers want lower prices, of course they do. The question Walmart is answering, and the one worth asking about your own business, is which customers, on which products, in which channels will a price investment actually convert into growth? That is a completely different question, and it requires commercial precision most businesses have not built.
05:12 Don’t follow the herd or cut discounts and prices just to stay competitive. To grow, you need a business that knows where to hold and where to move. Do you have a business like that?
How to Respond to Price-Sensitive Customers Pushing Back on Price
05:29 Here’s a question: when a customer pushes back on your price, what happens in your business? Because I know, in most businesses I’ve worked with, there are pretty much like two options: give ground and lose margin, or hold the line and risk losing the account. That conversation, repeated across every rep, every account, every renewal, is where your margin goes.
05:56 The businesses that hold through this tough, high-pressured environment have built a third option. Now, let me just show you what that looks like.
Using Pricing Structure to Serve Price-Sensitive Customers
06:05 So, a case example using the DuluxGroup. Most people think of Dulux as a paint brand, but it’s actually a portfolio of brands at different price points for different customers. Dulux, for example, is the premium offering, professional painters, quality-conscious homeowners, projects where the finish really matters. Cabot’s is a completely different purchase occasion. It’s like timber stains and decking, a customer buying for a specific job with a very specific technical need. Selleys is adhesives and sealants, different buying triggers again, different customers. Each brand does a very different commercial job; each protects the other.
06:52 When a customer cannot justify like the Dulux premium price, the answer is not a discount on Dulux. There’s someone else in the portfolio for them to go to. The Dulux brand stays at the Dulux price, the value ladder is intact. That is the third option. The customer does not have to leave, Dulux doesn’t have to concede. The architecture handles it. Do you have something like that in your business?
Grainger and Zoro: Creating Options for Price-Sensitive Customers
07:23 Here’s another example: W.W. Grainger, the US industrial distribution business, safety equipment, power tools, fasteners, maintenance supplies, everything a manufacturing facility needs to keep running. Their model is deliberately split. Grainger itself is a high-service and high-premium-price business. When you buy from them, you’re not just buying a product, you’re buying emergency delivery, account management, inventory support, the certainty that the part arrives before the line goes down. That has genuine value for large industrial accounts, and Grainger knows it and charges for it.
08:09 Zoro is their online brand, lower price points, self-serve, fast fulfillment. It exists specifically for the customer who does not need or cannot justify the full Grainger relationship and price. Instead of Grainger discounting itself to keep that customer, there is a separate vehicle built for them.
08:32 Now, Grainger raised their prices, I think a few years ago, something like ’21 and ’22. They held them as inflation moderated and didn’t give the increase back. Revenue and gross margin both grew. Why? Because the customer who stayed at the Grainger price point had already demonstrated that they value the service, and customers who couldn’t justify it had somewhere else to go without Grainger having to choose between the price and the account.
09:01 The point of both of these case studies is really the same: neither business ends up in the position where every pricing conversation ends with a concession or a lost account. They’ve built something that meant the answer to “I need a lower price” was not just like “Fine, here you go,” it’s “Here is where you go.” Very different.
Building a Pricing Structure Around Customer Segments
09:24 You may actually have the ingredients to do this yourself, like multiple brands often from acquisitions you’ve made, different product lines, different service capabilities, different customer segments, channels. The raw material is already probably there for you. What most businesses don’t have, and this may be your situation, is the commercial architecture to monetise any of it.
09:50 From what I’ve seen, acquisitions get very quickly absorbed into IT systems, ERPs, without anyone really asking how they change the overall commercial pricing structure. Similarly, product hierarchies become messy and overlapping; brands that should sit at different price points for very different customers end up competing with each other on price instead of the same sales conversation. The result is not a value ladder; it’s a discount ladder. And every cost increase makes it worse, manual, inconsistent, a different answer in every conversation until the positioning, whatever was left of it, is gone.
Why Price Adjustments Alone Cannot Protect Margins
10:37 And here is the point that matters more than anything: even if you fix the process, the price rise process, and it becomes extremely structured, and you can implement and execute cost pass-throughs very quickly, it still will not solve the problem. A price adjustment process without a value-based architecture underneath it is just a faster way to execute the wrong thing. You are not solving the margin erosion problem; you’re actually systematising it. Every cost increase, however well executed, pushes a number the customer may not believe in, and they’ll push back. The team probably will fold, and the process that holds the whole structure together fails. But the structure, really, when you look at the structure, was never really built on anything solid.
11:32 The process has to sit on top of a price architecture that is built around what the customer actually values. Without that, you’re not protecting margin, you’re just losing it more efficiently.
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Conclusion: Three Questions to Ask About Price-Sensitive Customers
11:47 So, here are three questions before your next pricing decision:
- Where in your customer base do you have genuine pricing power?
- Where does the customer actually believe what you deliver is worth more than what you charge?
- Where are you leaving margin on the table with customers who would pay more, and do you have a third option, somewhere for a price-sensitive customer to go that is not a concession on what you actually value?
12:20 If you cannot answer those clearly, what you’re doing is not pricing strategy; it’s reacting. And in this environment, reacting is the most expensive thing you can do.
Read This CEO Pricing Strategy To Improve Margin Management & EBIT
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