When Markets Are No Longer Price Sensitive

Ben Bajarin / October 13th, 2011

There will always be a customer who only wants the lowest cost products. That truth however, does not represent the whole market. Price, for the majority of consumers, is not the only driving purchasing force.

If in every market the lowest cost product was all consumers wanted–then we would all be driving Toyota Corollas.

The fact of the matter is, in markets where consumers are mature low-cost is only attractive to a segment of the market but not the market as a whole.

Keep in mind, I am making a distinction between mature markets and mature consumers. Mature markets are one where a category or product is no longer new and well understood. Mature consumers are ones who have been shopping long enough to have pre-determined needs, wants, and desires on a variety of goods.

Developed markets for the most part have mature consumers. Because of that fact, new product categories will mature faster than in emerging markets. So for example, smart phones are still largely an immature market. Many consumers still do not own a smart phone. This market however, is maturing rapidly because we have mature consumers. Interestingly, they are not just buying the cheapest smart phones on the market.

Emerging markets consist of consumers who are maturing, still developing their needs, wants, and desires for a variety of goods. This is because the big trend in emerging markets is the rising middle class. The rising middle class has not historically had much disposable income prior to their “rising”; therefore, they were not generally consumers of a large variety of goods.

Since they have attained more disposable income they have began to consume more goods and are therefore, maturing as a consumer learning what their needs, wants, and desires are with a variety of goods.

I belive that in a market where consumers themselves are maturing price is more important. You need to first consume goods for the first time before you refine your tastes and begin to appreciate differentiation. Therefore, low price products help these consumers consume the goods because of the lower barrier to consume said good.

PCs, smart phones, and tablets are a good example of this in emerging markets. Lower costs will help these consumers first experience these products and learn what they like and don’t like. As they flesh out their needs, wants, and desires for these products they will then begin to shop with a more keen eye. When that happens, differentiation or products designed for a market segment becomes the strategy–not low-cost.

In a number of books I’ve read on the subject the observation is continually made that when a market matures it fragments. The below slide shows how this happened within the automobiles market.

 
Consumers first owned a car that was of lower cost. As they continued to own more cars they began to mature as a consumer of automobiles and eventually decided they wanted a minivan, truck, sports, or economy car. They made this decision based on their needs, wants, and desires and then chose the appropriate product. To re-emphasize my point, this decision was not based on price alone but on needs, wants, and/or desires.

All of this has a profound impact on how consumer technology companies orient themselves going forward. The reality is some markets are price sensitive and some are not. Companies need to be wise to understand which markets to enter and have an appropriate strategy.

The bottom line is developing a product to fill a consumers need, wants, and desire is a better strategy than trying to be the low-cost leader.

Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio
  • Rich

    Interesting!

    I think you could argue the opposite for emerging markets though. Especially in luxury markets or consumer tech. Come to Vietnam/Indonesia and see what I mean…. the middle/upper classes are blowing their cash on items waaaay beyond their means.

    It’s a massive status symbol to have an apple mac or a BMW, far more than it is in the west. (Where no one is much impressed). and the newly minted comfortable middle classes will pay over the odds for them.

    In some markets they’ll pay whatever it takes actually. The governments get that, and put 200-300% import tax on luxury cars, and they keep buying. Not just the elite in fact, but people who can only just about afford it and crave the status symbol now and worry about the financial ramifications later.

    In the west, mature consumers can be more price sensitive because they understand that buying that BMW in cash or credit is going to be a huge liability down the line, especially if they’re expecting wage stagnation and rising costs of living.

    In emerging markets everything is growing, wages are rising, there’s cheap credit everywhere, and people think things are just going to get better and better, and are very willing to blow cash on something that impresses the neighbours.

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