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A White Paper By B2B International Market Research Pricing Research – What Do Our Customers Value?

Pricing Strategy Research | Customer Value Research

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Understand how price strategy research can help in maximizing profits. Techniques discussed include conjoint, SIMALTO and price trade off approaches.

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Page 1: Pricing Strategy Research | Customer Value Research

A White Paper By B2B International Market Research

Pricing Research –What Do Our Customers Value?

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Establishing Price Relative To Value

It is a difficult task for the b-to-b marketer to establish the value which customers attach to their products and services.

– Too high a price, and they risk losing out to the competition.

– Too low, and they risk leaving money on the table for the customer. In setting a price that is “too low” of course may increase demand and enable the company to expand its market share.

All too often, b-to-b marketers set the price too low, as they fail to recognise the value offered by their products and services.

We turn to the concept of market equilibrium which helps to solve pricing problems.

Figure 1 - Equilibrium And The Value Equivalence Line

Products and services priced too highly relative to their benefits lose out (see the “share loser” (4) in the diagram) whereas those priced attractively relative to their benefits gain share (the “share gainer” (5) in the diagram). This is illustrated in Figure 1 below.

Pricing Strategy & Customer Value Research – © B2B International Market Research

Customer-perceived benefits

Perc

eive

d Pr

ice

Value Equivalence Line

ShareGainer

ShareLoser

1

2

3

4 5

Companies at this side of the value equivalence line will lose market share

Companies at this side of the value equivalence line will win market share

Companies on the value equivalence line will stay in equilibrium because their prices and benefits are in balance

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Under-Pricing Is A Common Problem

In practice, b-to-b marketers lose out, due to a number of pricing problems:

– The company may not realise their prices are out of line relative to their competitors

– And rather than overpricing their products and services, often the biggest problem is under pricing

In reality, in b-to-b markets there is a great deal of customer loyalty towards suppliers.

– Buyers often feel it is safer to stay with the devil they know

– For just a small advantage in price they feel it is not worth switching suppliers – going through the rigmarole of new supplier approvals, and who knows if that supplier would then raise their prices in a couple of months?

However, it would be crude marketing to simply increase prices and bank the proceeds

– In markets other than commodity markets, buyers would hope that following a price rise, they would see a measurable improvement in the product or service.

It is therefore essential that we understand the value attached to the different elements of the offering so that these can be adjusted to make a more attractive customer value proposition to the customer, in order to justify a hike in price.

Imagine increasing prices by 10% - this could enable a significant increase in a company’s bottom line, even doubling profits if only a few customers are lost due to the price rise. And this is the question – what will be the loss of custom?

Pricing Strategy & Customer Value Research – © B2B International Market Research

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Remind Customers Of The Benefits They Receive

Let us think for a minute how customers value the goods and services that they buy. 

– Not enough companies take the time to remind their customers about the benefits of the products they purchase. 

– Typically the features of the product or service are promoted, with little attention paid to the benefits – which customers have to work out the benefits themselves. 

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.

But how do we know what is valued by customers, and what are the true benefits of a supplier’s product or service?

Without speaking to customers themselves, it is risky to try to ascertain the value and benefits of the company’s products and services. Involving the help of market researchers to identify and 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.

Pricing Strategy & Customer Value Research – © B2B International Market Research

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Using A Simple Points Spend To Assess Benefit

A Points-Spend approach is a relatively simple method of presenting the customer with a list of the perceived benefits and allowing the customer to spend their points appropriately according to what they value most.  An example of a points spend question is shown in Figure 2 below.

On analysing the date from the points spend question, the market researcher is able to understand how customers ascertain value to the products and services they purchase.

This technique however does have its limitations:– If administered by telephone, the respondent would

struggle to remember more than a handful of issues, so the opportunity of exploring all the perceived benefits of the product or service is restricted. 

– Separating the elements and assigning a value to each 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 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.

POINT SPENDOffering a wide range of services  Working in partnership with our company  Providing high quality products  Offering advice as and when required  Providing competitive prices  Ease of doing business  Providing reliable delivery  

100

Let me share with you some things that other people have said have influenced their choice of supplier – I would like to get an understanding as to how important these issues are to your organisation. In order to do this, I will read the factors out and then ask you to spend 100 points across the different factors to indicate their importance to you. You can, of course, spend all your points on just a few factors or across all of them.

Figure 2 -Points Spend Question

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Conjoint AnalysisUsing Science To Value Benefits

The technique of Conjoint analysis has long been used by market researchers as an effective method of evaluating the value of different elements of an offering.

There are a number of different types of conjoint analysis, but essentially the technique is a trade-off model where respondents are able to compare different offerings alongside each other, and choose between them.

Let us take a simple example, by identifying the

value of different features of an envelope. The

envelope could be differentiated by:

– Colour

– Method of sealing

– Address facility

These different features present eight possible

combinations which could be presented to a

respondent to find out which they prefer, as

shown in Figure 3 below.

Figure 3 Concept Method of sealing Address facility Colour1 Self-seal Window White2 Self-seal Window Brown3 Self-seal No window White4 Self-seal No window Brown5 Glue Window White6 Glue Window Brown7 Glue No window White8 Glue No window Brown

Pricing Strategy & Customer Value Research – © B2B International Market Research

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Conjoint AnalysisUsing Science To Value Benefits (Cont’d)

To elevate the output of the Conjoint analysis and gain a true judgement on preference, it is important to assign a price to each of the offerings:

– Assigning one high price, one medium and one low, it allows us to test people's interest at different price levels – this provides 24 options to put before respondents. 

– These 24 “concepts” are presented to respondents who are asked which they would be most likely to buy. 

Conjoint analysis uses sophisticated software which calculates the values attributed to the different features of the envelope despite this not being asked outright.

Despite Conjoint analysis offering a useful evaluation for how buyers value their products and services, it is limited in b-to-b markets.  It works best when the features of an offering are distinct and simple – like the envelope. 

In b-to-b markets, however, there are many more tangible and intangible features such as the relationship with the salesperson or account manager, technical back-up or the reliability of delivery. 

The b-to-b marketer faces difficulty in narrowing down the key features of the offering

– Adding options to the features chosen, as well as pricing levels, gives a multitude of permutations for respondents to consider. 

– Although this can be reduced to a more manageable number by the conjoint statistician, this reduction can affect the accuracy and therefore reliability of the result.

There is also the issue of sample sizes – to gain an accurate result, a minimum of 200 respondents is required and statisticians would argue for twice 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

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SIMALTO AnalysisA Better Way To Assess Value For Business Researchers

SIMALTO (simultaneous multi-attribute level trade-off) provides a strong alternative to conjoint analysis, and has the benefit of being more suitable for use in b-to-b markets.    

In SIMALTO analysis, each element of product or service is broken down to form a list of the attributes for respondents to consider.

Figure 4 – Example of Face-to-Face Relationships

For each of these attributes of products or services, varying levels of service are described, from a low level of service to a high level of service. Figure 4 below shows an example of attributes for a “Relationship” aspect of a SIMALTO trade-off.

Pricing Strategy & Customer Value Research – © B2B International Market Research

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SIMALTO AnalysisA Better Way To Assess Value For Business Researchers (Cont’d)

We look in more detail at how the respondent completes the SIMALTO exercise:

1. Choose which attributes (down the left-hand side) are important when making a purchasing decision. 

2. For the chosen attributes, show what level they are currently receiving (columns 1 to 4). 

3. Show what level they would like to receive; often this is on the right hand side. 

4. Allow the respondent a number of points to spend to indicate how much they would like to receive the improvement that would move them from what they currently receive to their ideal. 

5. The grid has numbers in the bottom of each square from 0 to 15 which indicate the ‘cost’ of moving up a level. Each movement up a level costs the respondent 5 points. With only limited points to 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.

The clear benefit over Conjoint analysis, is that SIMALTO allows the consideration of many more attributes, and a good degree of depth and understanding of what respondents truly value, against to what they receive currently. Furthermore, SIMALTO is not as dependent on a large sample size as is conjoint.  Indeed, the findings from just one respondent (i.e. a large, key customer) would be highly informative.  Being able to work with small samples is a major advantage of SIMALTO in b-to-b markets.

Figure 5

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Conclusion

We began this paper with the claim that many b-to-b products and services have a price tag based on judgement. In many cases, there is no objective and independent assessment of what customers truly value. This results in many b-to-b companies failing to price their products and services according to their value, thus leaving money on the table for customers, and lower levels of revenue and profit for their company.

The marketing team must understand the degree to which the product or service is valued, in order to effectively price and position it within the market. This paper evaluates both simple imaginative questions (points-spend) and more complex (Conjoint analysis and SIMALTO) techniques. We conclude that unless the product is very simple, it is likely that SIMALTO will be the best option for evaluating value in business-to-business situations.

Thank you for reading our White Paper on Price & Customer Value Research.

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