Pricing Research - What Do Our Customers Value?

Paul Hague and Matthew Harrison, B2B International

Market research can aid businesses facing the challenge of pricing their goods and services by analyzing overt and hidden benefits facing customers. Conjoint analysis and SIMALTO analysis are techniques used by market researchers for assessing the value of an offering. A price tag based on objective assessment rather than judgement is the backbone of effective pricing.

Establishing Value - A Job Not Well Done
Establishing the value that people put on the goods and services they sell is one of the most difficult tasks for the business-to-business marketer. If they pitch their price too high relative to the perceived benefits, then quite clearly they will lose out to the competition. Equally, if the price is too low, the company is in danger of leaving money on the table for the customer. Of course, a low price may encourage extra demand and the company could increase its market share.

For most business-to-business marketers, finding the right price is a judgement which many get badly wrong – usually charging too little because they don’t realise the value of their offerings.

The concept of market equilibrium should, in theory, solve any pricing problems that are way out of line. Products that are priced too high relative to their benefits will lose out (product 4 in the diagram) while those that are attractively priced relative to their benefits gain share (product 5 in the diagram). This is illustrated in Figure 1 below.

A Common Problem - Leaving Money On The Table
However, the theory is very different from practice, and it may take too long for a supplier of goods and services to find out that their prices are out of line. In the main, the problem is not prices that are too high (because this becomes evident very quickly as sales of the product and services begin to stall); the biggest problem is under pricing. In the imperfect markets in which we operate, not all potential customers will be aware that there is a bargain to be had, and the supplier will not benefit from the increase in share that should by rights be his.

An increase in price of 10% can make a huge difference to a supplier’s bottom line, possibly doubling profits if the price increase is accompanied by only a small loss of customers. But this is the big question – what will be the loss of custom?

The reality is that in many business-to-business markets customers are extremely loyal to their suppliers. In part this is because buyers believe it is safer to stay with the devil they know. They fear moving for a small price advantage, reckoning that it isn’t worth incurring the problems associated with obtaining new supplier approvals or risking the new supplier putting up their prices in a few months’ time.

It may appear to be a clever move to extract more profit by simply putting up prices and pocketing the proceeds but this is crude marketing. If prices rise, buyers would hope that there is a commensurate improvement in the benefits. This makes it doubly important that we understand the value attached to the different elements of the offering so that these can be adjusted to make a more attractive proposition to the customer, justifying any price hike.

Reminding Customers of the Benefits They Receive
Let us think for a minute how customers value the goods and services that they buy. Too few companies remind their customers about the benefits of the products they purchase. If they promote anything it is typically the features, and customers are left to work out the benefits for themselves. This was brought home in a recent story told by a sales manager of a packaging material supplier. The sales manager was due to attend an annual review with a large customer and he sought the advice of the account salesman before making the visit. The salesman was extremely worried about the meeting, fearing they would lose the account as he had been told by the buyer that a price reduction was necessary if the company wanted to keep the account. The buyer threatened that there were many eager competitors baying at his door. The salesman could not think of any good reason for maintaining their current prices, let alone obtaining an increase.

On the day of reckoning the buyer met the sales team from the packaging materials company and walked them through the factory to his office. On their way, the sales manager of the packaging materials company made polite conversation, asking about a new production line which they walked past. It materialised that the new production line had been built in what used to be a warehouse for storing cardboard boxes which the packaging materials company supplied. Just-in-time deliveries from the packaging company had released this storage space which was now being put to more productive use. The sales manager was not slow in raising this issue in his presentation, pointing out that the reliable and speedy deliveries created valuable factory space. Without this simple reminder the buyer would have taken the benefit for granted, possibly not even thinking about it or giving the credit to the supplier. The packaging materials company was at least able to maintain their prices and was not forced into giving any further discounts. This short story illustrates the importance of constant vigilance in looking for benefits that are given to customers and attempting to put a monetary value on them.

Assessing the Value of Benefits With A Simple Points-Spend
Leaving the assessment of customer value to the sales team is risky and it may be safer to ask the help of market researchers to identify and measure the elements of a customer value proposition. A very simple approach is to present the buyer with a list of the benefits and ask him to indicate their relative importance by spending a number of points according to which are most valued. The points-spend gives a rough indication of how buyers see value in the products and services they buy.

This method of questioning has a number of limitations. When posed over the telephone it is difficult for a respondent to remember more than half-a-dozen issues, so the opportunity of exploring value benefits in detail is restricted. Furthermore, the idea of spending points in this way is not how most buyers make their decisions. They tend to think ‘in the round’ rather than putting a value on the different elements of the offering. In order to obtain a more detailed understanding of how people value the products and services, we have to turn to more sophisticated techniques.

To read the rest of this white paper on the B2B International website, click here.

Paul Hague and Matthew Harrison work at B2B International.

[Oct 14, 2009]