Pricing Strategy Research | Customer Value Research
Understand how price strategy research can help in maximizing profits. Techniques discussed include conjoint, SIMALTO and price trade off approaches.
Published on: Mar 4, 2016
Transcripts - Pricing Strategy Research | Customer Value Research
Pricing Research –What Do Our Customers Value?A White Paper By B2B International Market Research
Establishing Price Relative To ValuePage 2 It is a difficult task for the b-to-b marketer Products and services priced too highly relative to to establish the value which customers their benefits lose out (see the “share loser” (4) in attach to their products and services. the diagram) whereas those priced attractively relative to their benefits gain share (the “share – Too high a price, and they risk losing out to the competition. gainer” (5) in the diagram). This is illustrated in Figure 1 below. – Too low, and they risk leaving money on the table for the customer. In Figure 1 - Equilibrium And The Value Equivalence Line setting a price that is “too low” of course may increase demand and enable the company to expand its Value Equivalence Line market share. Companies at this side of the value equivalence line Companies on the value All too often, b-to-b marketers set the will lose market share 1 equivalence line will stay in equilibrium because their prices price too low, as they fail to recognise the Perceived Price and benefits are in balance Share value offered by their products and Loser services. 4 2 5 Share Gainer We turn to the concept of market Companies at this side of the value equivalence line equilibrium which helps to solve pricing 3 will win market share problems. Customer-perceived benefits Pricing Strategy & Customer Value Research – © B2B International Market Research
Under-Pricing Is A Common ProblemPage 3 In practice, b-to-b marketers lose out, due to a In reality, in b-to-b markets there is a great deal number of pricing problems: of customer loyalty towards suppliers. – The company may not realise their prices – Buyers often feel it is safer to stay with the devil they are out of line relative to their competitors know – And rather than overpricing their products – For just a small advantage in price they feel it is not and services, often the biggest problem is worth switching suppliers – going through the under pricing rigmarole of new supplier approvals, and who knows if that supplier would then raise their prices in a couple of months? Imagine increasing prices by 10% - this could enable However, it would be crude marketing to simply a significant increase in a increase prices and bank the proceeds company‟s bottom – In markets other than commodity markets, buyers line, even doubling profits would hope that following a price rise, they would see a measurable improvement in the product or service. if only a few customers are lost due to the price rise. It is therefore essential that we understand the And this is the question – value attached to the different elements of the what will be the loss of offering so that these can be adjusted to make custom? a more attractive customer value proposition to the customer, in order to justify a hike in price. Pricing Strategy & Customer Value Research – © B2B International Market Research
Remind Customers Of The Benefits They ReceivePage 4 Let us think for a minute how customers But how do we know what is valued by value the goods and services that they buy. customers, and what are the true benefits of a – Not enough companies take the time to supplier‟s product or service? remind their customers about the benefits of the products they purchase. Without speaking to customers themselves, it is – Typically the features of the product or risky to try to ascertain the value and benefits of service are promoted, with little attention the company‟s products and services. Involving paid to the benefits – which customers the help of market researchers to identify and have to work out the benefits themselves. measure the value and benefits of a supplier‟s products and services ensures an independent and cohesive approach. In order to measure value and benefit, there are a number of techniques which can be used by the market researcher, which we explore over the next few pages. This underlines the importance of constant vigilance in recognising the benefits that are valued by customers, and attempting to assign a monetary value to those benefits. Pricing Strategy & Customer Value Research – © B2B International Market Research
Using A Simple Points Spend To Assess BenefitPage 5 A Points-Spend approach is a relatively simple This technique however does have its method of presenting the customer with a list limitations: of the perceived benefits and allowing the – If administered by telephone, the respondent would customer to spend their points appropriately struggle to remember more than a handful of issues, so the opportunity of exploring all the perceived according to what they value most. An benefits of the product or service is restricted. example of a points spend question is shown – Separating the elements and assigning a value to each in Figure 2 below. in this way is not how most buyers come to a decision about suppliers. They are more likely to think „in the round‟ rather than putting a value on the different On analysing the date from the points spend elements of the offering. question, the market researcher is able to In order to obtain a more detailed understanding understand how customers ascertain value to of how people value the products and the products and services they purchase. services, we have to turn to more sophisticated techniques. Figure 2 -Points Spend Question Let me share with you some things that other people have POINT SPEND said have influenced their choice of supplier – I would like Offering a wide range of services to get an understanding as to how important these issues Working in partnership with our company are to your organisation. In order to do this, I will read the Providing high quality products Offering advice as and when required factors out and then ask you to spend 100 points across Providing competitive prices the different factors to indicate their importance to you. Ease of doing business You can, of course, spend all your points on just a few Providing reliable delivery factors or across all of them. 100 Pricing Strategy & Customer Value Research – © B2B International Market Research
Conjoint Analysis Using Science To Value BenefitsPage 6 The technique of Conjoint analysis has Let us take a simple example, by identifying the long been used by market researchers as an value of different features of an envelope. The effective method of evaluating the value of envelope could be differentiated by: different elements of an offering. – Colour There are a number of different types of – Method of sealing conjoint analysis, but essentially the – Address facility technique is a trade-off model where These different features present eight possible respondents are able to compare different combinations which could be presented to a offerings alongside each other, and choose respondent to find out which they prefer, as shown between them. in Figure 3 below. Figure 3 Concept Method of sealing Address facility Colour 1 Self-seal Window White 2 Self-seal Window Brown 3 Self-seal No window White 4 Self-seal No window Brown 5 Glue Window White 6 Glue Window Brown 7 Glue No window White 8 Glue No window Brown Pricing Strategy & Customer Value Research – © B2B International Market Research
Conjoint AnalysisPage Using Science To Value Benefits (Cont’d) 7 To elevate the output of the Conjoint analysis and In b-to-b markets, however, there are many more gain a true judgement on preference, it is important tangible and intangible features such as the to assign a price to each of the offerings: relationship with the salesperson or account – Assigning one high price, one medium and manager, technical back-up or the reliability of one low, it allows us to test peoples interest delivery. at different price levels – this provides 24 The b-to-b marketer faces difficulty in narrowing options to put before respondents. down the key features of the offering – These 24 “concepts” are presented to – Adding options to the features chosen, as respondents who are asked which they would well as pricing levels, gives a multitude of be most likely to buy. permutations for respondents to consider. Conjoint analysis uses sophisticated software which – Although this can be reduced to a more calculates the values attributed to the different manageable number by the conjoint features of the envelope despite this not being statistician, this reduction can affect the asked outright. accuracy and therefore reliability of the result. Despite Conjoint analysis offering a useful evaluation for how buyers value their products and There is also the issue of sample sizes – to gain services, it is limited in b-to-b markets. It works an accurate result, a minimum of 200 respondents best when the features of an offering are distinct is required and statisticians would argue for twice and simple – like the envelope. this number, depending on the population. Despite its benefits, Conjoint analysis is not without its problems for the business-to-business researcher. Pricing Strategy & Customer Value Research – © B2B International Market Research
SIMALTO Analysis A Better Way To Assess Value For Business ResearchersPage 8 SIMALTO (simultaneous multi-attribute level For each of these attributes of products or trade-off) provides a strong alternative to services, varying levels of service are conjoint analysis, and has the benefit of being described, from a low level of service to a high more suitable for use in b-to-b markets. level of service. Figure 4 below shows an In SIMALTO analysis, each element of product example of attributes for a “Relationship” or service is broken down to form a list of the aspect of a SIMALTO trade-off. attributes for respondents to consider. Figure 4 – Example of Face-to-Face Relationships Pricing Strategy & Customer Value Research – © B2B International Market Research
SIMALTO AnalysisPage A Better Way To Assess Value For Business Researchers (Cont’d) 9 We look in more detail at how the respondent The clear benefit over Conjoint analysis, is that completes the SIMALTO exercise: SIMALTO allows the consideration of many 1. Choose which attributes (down the left-hand side) are more attributes, and a good degree of depth important when making a purchasing decision. and understanding of what respondents truly 2. For the chosen attributes, show what level they are currently receiving (columns 1 to 4). value, against to what they receive currently. 3. Show what level they would like to receive; often this Furthermore, SIMALTO is not as dependent on is on the right hand side. a large sample size as is conjoint. Indeed, the 4. Allow the respondent a number of points to spend to findings from just one respondent (i.e. a large, indicate how much they would like to receive the improvement that would move them from what they key customer) would be highly currently receive to their ideal. informative. Being able to work with small 5. The grid has numbers in the bottom of each square samples is a major advantage of SIMALTO in from 0 to 15 which indicate the „cost‟ of moving up a b-to-b markets. level. Each movement up a level costs the respondent 5 points. With only limited points to Figure 5 spend, respondents have to choose what improvements they really want. This trade-off gives a utility or value to the different levels of the attributes. An example of this working in practice is shown in Figure 5, right.
ConclusionPage10 We began this paper with the claim that many b- The marketing team must understand the degree to-b products and services have a price tag based to which the product or service is valued, in order on judgement. In many cases, there is no to effectively price and position it within the objective and independent assessment of what market. This paper evaluates both simple customers truly value. This results in many b-to-b imaginative questions (points-spend) and more companies failing to price their products and complex (Conjoint analysis and SIMALTO) services according to their value, thus leaving techniques. We conclude that unless the product money on the table for customers, and lower is very simple, it is likely that SIMALTO will be the levels of revenue and profit for their company. best option for evaluating value in business-to- business situations. Thank you for reading our White Paper on Price & Customer Value Research. To access further white papers and publications by B2B International, please visit: http://www.b2binternational.com/publications/ Keep up-to-date with industry developments and news by following our blog: http://www.b2binternational.com/b2b-blog/ Find out what‟s going on at B2B International by following us on Twitter: @B2B_Insight Pricing Strategy & Customer Value Research – © B2B International Market Research
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