When we ask B2B customers about the reasons they choose the brands they work with, we hear similar themes crop up across various sectors: price, service, and product availability, to name just a few. We also hear similar themes raised as pain points related to working with chosen brands.

B2B decision-making on brands is a balance of a range of different factors. While customers may perceive the price offered by one brand to be high, excellent benefits and its industry-leading technology offering can justify what they’re asked to pay. Equally, customers may choose to forfeit added-value benefits offered by more premium providers, like additional training or resources, if the price point of another brand with a less sophisticated offering is too competitive to overlook.

Further Reading

3 B2B Pricing Challenges and How to Overcome Them

Read now

The Value Equivalence Framework

To evaluate the perception of brands within this ecosystem of different decision-making factors, we often use a simple questioning technique that asks research respondents to think in relative terms. This technique is called the value equivalence framework and consists of two very simple questions:

• How would you rate [BRAND]’s benefits versus other similar brands? Answered using a 5-point rating scale from ‘Significantly better’ to ‘Significantly worse’

• How would you rate [BRAND]’s price versus other similar brands? Answered using a 5-point rating scale from ‘Significantly more expensive’ to ‘Significantly cheaper’

The variables in bold are not always set in stone and can be tweaked to suit the brand in question. For example, you may want to measure quality and price if your brand is more product-focused (or even a different product-focused attribute). That said, it is recommended to include one attribute that is price or value-related, as this framework focuses on determining whether a brand’s value is justified by other parts of its offer.

Analyzing the Data

We tend to analyze the feedback from these two questions together, plotting the results on two different axes.

Taking the average score for both questions for the brand that is being rated, you will get your two data points for your two axes. This will give you your plot point for your brands, and you will be able to see how they are positioned against each other. As a general rule, your brand wants to be positioned on the right of the line; brands on the left of the line are more at risk of losing market share based on lack of perceived value.

To understand the feedback here, consider where the brands are positioned. Brand A is perceived as a more expensive provider, but its benefits are said to be significantly better than other brands, so it is in a comfortable position of a justified premium. You could even argue that Brand A has scope to increase its premiums further to get closer to the value equivalence line. By contrast, Brand B is perceived as having worse benefits, but its prices are also very low compared to others in the market, so its position is relatively balanced. You can add as many brands as you have data for to this chart so you can build a picture of the market landscape and see where your brand is positioned on value equivalence against other providers.

Further Reading

Competitive Landscape Analysis with Porter’s Five Forces Framework

Read now

When and How to Use the Value Equivalence Framework

The value equivalence framework is commonly seen in studies that touch on the market landscape a brand operates in and is a useful gauge for understanding how it’s perceived against competitors. To do this, you would need to make sure you ask respondents not just about your primary brand, but also about competitor brands. These should be brands that the respondents use so that they can give them a fair rating. You can play around with the results and compare data by segments within your sample to see if the perceived value of brands differs by group.

A final note: be careful of any potential bias in your sample and how this may impact the results. If you are interviewing your customers who you know are loyal supporters of your brand, don’t be surprised to see yours performing better than the competition – a representative market sample will give you a less biased view of this topic.

To discuss how our tailored insights programs can help solve your specific business challenges, get in touch and one of the team will be happy to help.

The post The Value Equivalence Framework: A Simple but Powerful Questioning Technique appeared first on B2B International.

A brief overview of some of the unique challenges involved in B2B pricing and how to handle them

Pricing exercises are a common component of market research projects and a range of methods have been developed to identify the optimal price for a new product or service being brought to market. The most commonly used methods are the Van Westendorp Price Sensitivity Meter, the Gabor-Granger pricing model or some form of choice-based exercise (MaxDiff or Conjoint). All of these methods are well established and widely understood, but they were all designed for consumer markets and often we encounter situations in B2B contexts where these models are not sufficient. Below are a few examples of additional complications that may arise and how we can work around them.

Not All Customers Are Created Equal

The first example of how B2B markets differ from others is fairly obvious but can lead to serious miss-steps if not addressed.

We have a new product we want to bring to market. We are not sure what would be an appropriate price range for our new product as it is too different from existing solutions that are available, so we conduct a Van Westendorp Price Sensitivity Meter including the extension. We have designed our sample to be representative of the market.

Applying the standard approach to analyzing the results suggests an optimal price in the range of $12-15$ but digging deeper it becomes clear that going to market at this price would be a mistake.

A small segment of the sample shows very keen interest in the solution seeing large benefits in its novel features. Running the exercise for just this segment suggests a price range of $40-$50. Furthermore, although the segment is small, the businesses in the segments are not; each would likely purchase a large number of products each year at this higher price (as indicated by their answers to other questions in the survey).

Re-weighting the data to reflect the likely volumes of purchase each potential customer represents, and using the extension questions to estimate revenue generated at each price point, we can see that targeting this premium segment by aiming for a price in the $40-$50$ price range results in significantly higher expected revenue.

Perplexing Prices

In B2B settings, prices often have more than one component to them. A new support service may have a fixed monthly cost with a variable cost charged for each support call after the first 5 of the month, for example. How can we model this?

By adapting the Gabor Granger exercise we are able to generate a demand map of the price space.

This can in turn be used to produce a revenue index for the space and identify the price configurations which would result in the largest expected revenue.

Drop The Base Low

A client approached us with a potential new product that they wanted to test the appeal of and to help them understand how much they could potentially charge for it. They wanted to understand the value assigned to each functional benefit offered by the product as well as the overall willingness to pay for a solution containing a combination of these benefits.

To any experienced researcher this sounds like a classic candidate for a choice based conjoint study, but there is one problem: the number of potential customers is very limited and we estimate that the sample we can obtain is at most 40. This is pretty common in B2B markets, and it makes a conjoint study impracticable.

To generate the insights that the client required we conduct a Premium Extension exercise, mapping out the relative premiums buyers would be willing to pay for each benefit the new solution would introduce over their existing product, as well as what they would be willing to pay for something which combined multiple additional benefits.

The results are less statistically robust than a conjoint study but provide the same ability to assess the relative appeal of components and identify suitable price points for variously configured solutions.

To discuss how our tailored insights programs can help solve your specific business challenges, get in touch and one of the team will be happy to help.

The post 3 B2B Pricing Challenges and How to Overcome Them appeared first on B2B International.

The past year has forced all of us to adapt to a new way of life, both personally and professionally. In 2020, the dentsu CMO survey explored how CMOs have reacted to the impact of the pandemic, and importantly, how they are helping their business to navigate the future.

This report offers a new perspective on the data from that survey from the perspective of B2B CMOs. Compiled by B2B specialists at Merkle (a dentsu company), it aims to identify how B2B CMOs have responded to the pandemic and how prepared they are to navigate the future. It examines the views of 908 B2B CMOs, covering 12 countries and a wide array of business sizes and sectors.

The report also takes a close look at the B2B CMOs that are at the “frontier” among their colleagues – those who lead the way and ensure their organizations are as prepared as possible for the future. The survey reveals what sets them apart, what strategies they employ, and the learnings that other B2B CMOs can apply to their businesses.

The report covers:

• The challenges B2B CMOs expect to face over the coming 12 months
• The strategies employed by B2B CMOs over the past year
• The role of the B2B CMO
• How the performance of B2B CMOs is measured
• Future marketing strategies being implemented by B2B CMOs
• What sets apart Frontier B2B CMOs
• The differences between pure B2B companies and companies that sell to both businesses and consumers (B2B+C)

The post New Horizons: B2B CMO Guide to Navigating Complexity appeared first on B2B International.

An article in the Financial Times this week caught our eye. The article discusses the difficulties manufacturers are facing to produce an electric car for the mass market. Despite these difficulties, the race for leadership in the electric car market has been hotting up in recent months, with General Motors (GM) announcing their intentions to manufacture a car with a $30,000 price tag. Analysts have, however, expressed doubts as to whether an electric car can be manufactured at this price.

The article draws upon one of three strategies we have been writing about this month as part of our focus on marketing strategy – cost leadership. A cost leadership strategy is at its simplest a way of establishing competitive advantage through having the lowest cost of operation in the industry. In the case of electric cars, manufacturers are striving to create a car for the mass market, and this requires a focus on lowering production costs.

A successful cost leadership strategy is driven by factors such as efficiency and scale of operations, state-of-the-art manufacturing technologies and specialist knowledge and expertise. Mary Barra, GM’s chief executive, firmly believes the company has these capabilities and will be able to manufacture the car at a mass market price point.

The cost of batteries capable of delivering a 200 mile range are massive, although advances in technology should see prices drop in the coming years. Exploiting scale of production should also lead to decreases in manufacturing costs. Tesla, for example, plan to reduce costs significantly through building a “gigafactory” capable of doubling the current production rate of lithium-ion batteries.

It remains to be seen which manufacturer will be first to deliver a mass market electric car, but the race to cut costs and gain a crucial advantage is well and truly under way.

To read more about the different strategies available to businesses, follow the link below to read our article on marketing strategy.

The post The Race for Cost Leadership in the Electric Car Market appeared first on B2B International.

Developing a pricing strategy

Every company needs to ask itself the question “am I charging optimum prices that will generate the maximum profits for my sales?”. The consulting group McKinsey carried out a famous study that determined a price rise of 1% at an average company in the S&P 1500 index (which covers small through to large companies) would generate an 8% increase in operating profit if sales volume stay steady. With just a 1% price increase, sales are unlikely to waver much and the extra profit flows directly onto the bottom line.

The leverage of price is substantial. All overhead costs have been met and so the additional gross margin that is obtained (somewhere between 40% and 60% depending on the product or service) contributes completely to net profits. It does of course raise the question “why not increase prices by 5%, 10% or even 15%?”.

The manipulation of price upwards (or downwards) offers potential for increased profits. In order to make the right move and at the right amount, it is important to know the affect this will have on sales. If for example, a small reduction in the price of a product results in a disproportionately high increase in sales, a price reduction may be worthwhile. In this case, the elasticity of demand for the product is high as sales expand disproportionately to price cuts. Consumers are strongly motivated by small differences in price in petrol and diesel and will form queues to save a few pence per litre. This is on a micro level where fuel stations with different prices are within a short distance of each other. Still thinking of fuel prices, the demand for fuel in general is highly inelastic in that we will pay almost any price for the valuable fuel we need in our tanks as long as all fuel service stations charge the same figure.

Goods that are elastic are those that are easily substitutable one for another. So too are products that have very few differentiating features. The opposite of this is also true. Goods that are written into specifications and cannot easily be changed are likely to be inelastic and a price increase will have very little effect on demand (at least in the short term). Products that are differentiated with lots of special features or with a strong brand are likely to be inelastic because people will insist upon them irrespective of a (reasonable) price increase.

The formula for determining the elasticity of demand for a product or service is as follows:

Elasticity of demand = (% change in quantity)/(% change in price)

An easier though subjective way of determining the elasticity of demand is against the following checklist:

Price is one of the important means by which customers compare products and services with those of the competition. Take a group of suppliers that sit within a customer’s consideration set; some may be supported by strong branding, premium services, guarantees and the like and as such carry a substantial premium. Others could offer low-cost products, stripped of any wrap-around services. Customers recognize the difference in these offers and the value for money they represent. An expensive product with lots of features may be considered to offer fair value for money just as much as one that is cheaper but with fewer frills. In an economist’s perfect world, all these products would gravitate towards a point on the value equivalence line that cuts diagonally at 45 degrees from where the X and Y coordinates meet.

However, suppliers do not always fit neatly on the line. Some are perceived to be expensive with few benefits, in which case they sit to the left hand side of the line and can be predicted to lose market share, while others may be considered economically priced with a large number of benefits and so can be expected to win market share. These suppliers sit on the right hand side of the line. Knowing where a company sits on the value equivalence line is an important requirement of developing a marketing strategy. A company positioned on the right hand side of the value equivalence line has the option of leaving the price and benefits as they are and enjoying a growth in market share or raising prices and capturing more profit. Similarly, a company to the left-hand side of the value equivalence line knows that it must offer more benefits if it is to succeed or it must reduce its price if it wishes to compete. It could, of course, stay where it is if the plan is to milk the product and eventually exit from the market.

To learn more about this topic, please visit the following publications:

The Problem With PriceThe Importance Of The Value Equivalence LineHow To Avoid Competing On Price

The post Pricing Strategy: Name Your Price appeared first on B2B International.

If a brand holds a position away from the line, say it is perceived to have a high price relative to the perceived benefits (brand number 4), people will shun the product and it can be expected to lose market share. On the other hand, if a brand has a price against which the benefits are thought to be considerable (brand number 5), it will sit to the right-hand side of the VEL and attract more customers. It will win market share.

Over time the brand which is offering poor value (brand 4) will either drop out of the market or will have to make an adjustment by lowering its price or improving its perceived benefits. The brand which is offering a high perception of value for money because of its relatively low price compared to its perceived benefits will gain market share to the point where it begins to define the market. The value equivalence line will pass through this brand as it has reached a dominant position and is setting the standard for other brands. Equally, the owner of the brand could take the strategic decision to raise prices so that it falls back towards the value equivalence line (brand 5).

It should be emphasized that we are measuring perceptions of both price and benefits and these could be wrong. In the above example, company 4 is thought to offer relatively few benefits for the perceived price. It is just possible that the promotions supporting company 4 haven’t communicated the true benefits of the company and it is being maligned. If this is the case then a promotional campaign, correcting the perceptions, may well be the way forward. So too, a brand could be perceived to have a high price when in fact it offers very good value for money because it lasts longer than other products on the market. Again, this could be something that requires addressing through a communications campaign.

Understanding the position of brands on the VEL is important as it leads to strategic decisions on both pricing and product development.

Two simple questions can be asked to determine a company’s position on the VEL. These are:

How would you rate Company A on the benefits you get from buying its products and services compared to the benefits you get from other suppliers?

How would you rate Company A on the prices of its products and services compared to the prices of other suppliers?

The same questions can be asked of other companies in the market (e.g. companies B and C). The answers to these questions can be plotted on an XY graph to show the position of the brands and from these, a brand owner can formulate a pricing and product strategy.

The post The Importance of the Value Equivalence Line appeared first on B2B International.

The past decade has been a challenging one for business-to-business marketers in North America and Europe. The worldwide financial crisis, cheap Asian competition and the rise of online marketing and commerce have made most markets more competitive than ever and put huge pressure on margins. In many businesses the response to these challenges has been one of resignation – an acceptance that prices have to be reduced, margins squeezed and businesses less profitable. We at B2B International vehemently disagree with this view.

While it is true that cheap competition is more prevalent in b2b markets than ever before, this is balanced against another converse trend: the requirements of b2b decision makers are more sophisticated than ever before. Business-to-business decision makers are increasingly knowledgeable and increasingly discerning. Since 2007 we have seen the polarization of many business-to-business markets: the minority of price buyers are more price-focused than ever; simultaneously the majority of the market – value buyers – are more discerning than ever, with elevated needs based around service, brand and consultancy.

Figure 1 below illustrates how b2b suppliers increasingly base their offers around knowledge-based services. In Western markets, previously product-based industries such as IT and printing now predominantly offer services. This is in direct response to the shifting differentiating needs of b2b customers, which are moving Eastwards to ultimately encompass a range of sophisticated emotional needs. Relatively sophisticated needs that were previously regarded as differentiating needs are now simply hygiene factors, automatically expected in order for a provider to even enter the consideration set.

This provides a greater opportunity than ever before for sophisticated businesses to differentiate themselves through value marketing and value selling. The ten points below illustrate how to market and sell your offer around value rather than price, and can be applied to any b2b market.

1. Decide who you don’t want to sell to

   Business-to-business marketers know well that segmentation is all about aligning different propositions against groups of customers with different needs. Segmentation facilitates customer choice. Less recognized is the fact that segmentation also facilitates choice for us as b2b suppliers: the choice as to who to do business with and who not to do business with.

   As marketing is the profitable satisfaction of customers’ needs, customers or segments who will not provide us with the margin we require should be deselected. Just as customers are entitled to become increasingly discerning, so too are we as suppliers.

   Detailed definition and analysis (both market analysis and financial analysis) of your segments built around rigorous market research is the first, crucial step in deciding which customers you wish to serve.

    

2. Sell outcomes, not products

   Consumer marketers have long recognized that selling outcomes rather than products and their features is the path to higher margins. Firms that used to sell sports shoes now sell dreams of success or better wellbeing; perfume companies sell romance, sophistication or both. These outcomes are valued far more by consumers than the actual products that achieve these outcomes.

   Despite their protestations, business-to-business customers are similarly looking for outcomes: a buyer of IT equipment might require greater business efficiency; a buyer of recruitment services may actually be looking to buy business growth. Savvy b2b marketers ask themselves and colleagues “What are we really selling?” and build their marketing and sales approaches around these outcomes. Product features may be used to substantiate the outcome that is being sold, but should not form part of the message per se.

    

3. Be clear on what the customer will pay for

   Surprising numbers of business-to-business companies conduct no systematic research into customer requirements, and many fail even to consider that customer needs may change over time. This, not falling prices, is the reason for many business-to-business companies failing. Up to half of all companies in many b2b sectors continue to operate under the delusion that ‘product quality and price are all that matter’. Falling market share and diminishing margins are usually the result.

   The cause of this misunderstanding is frequently sales teams, who are widely listened to in b2b companies. Emboldened by their access to the customer and driven by short-term targets, b2b salespeople frequently misunderstand, oversimplify and miscommunicate customer needs.

   Independent market research and a more long-term, marketing-oriented mindset are good ways of improving the business’s understanding of customer requirements.

    

4. Business buyers have emotions too

   It is true that business-to-business customers tend to be less whimsical than consumers, and that their purchases tend to be less conspicuous. Yet emotions play a huge part in business-to-business purchase decisions.

   Risk aversion, respect and patriotism are all emotions weighing heavily on buyers in many markets, and reflect an emotional need for reassurance that the seller shares similar values and that the buyer is making the right decision. It used to be said, for example, that ‘you never get sacked for buying IBM’. Surveys of products in most b2b markets show the relationship with the account manager as one of the main drivers of both supplier choice and customer satisfaction. Surveys of French b2b buyers frequently show ‘being French’ as a top requirement, while in China ‘being from a Western country’ is a key driver among many engineering buyers.

   In addition to reassurance, a second category of emotional need is now developing among business-to-business buyers – the need for ‘a future together’. The choices available to b2b customers are increasing, economic cycles are shortening and job markets are becoming less secure. In parallel, a sophisticated understanding of cost-in-use and product life cost has developed. In response to this, customers increasingly require suppliers that will help them make the next innovation, tackle the next new market or create the next business model. In most b2b surveys, ‘innovation’ and ‘partnership’ are key needs, and usually they are insufficiently met.

    

5. Be a storyteller

   In looking for outcomes, business-to-business customers require a compelling, complex and multifaceted proposition comprising features, products and services, and providing emotional fulfillment. Business-to-business marketers and salespeople need to be able to knit these components of the proposition together seamlessly in order to make the ‘outcome’ they are looking for defensible and compelling. The same compelling story must be told to different parties within the decision making unit in a way that engages each of them. We must touch the ‘hot buttons’ of both the technical buyer and the commercial buyer, while maintaining coherence from start to finish. Rather than bombarding customers with a simplistic price/quality message, marketers and salespeople must take on the role of storytelling chameleons, clearly communicating complex propositions to complex decision making units.

    

6. Target the highest decision-maker possible

   Before selling and marketing on value, it is vital to establish an intimate understanding of the customer’s decision making unit. In particular, it is important to establish the most senior person who will place value on the offer. Targeting high increases the chances of making a big sale; more importantly, decision makers in strategic positions are most likely to think strategically about the offer and therefore place value on it.

   The matrix below helps identify who the most senior decision maker you can target is likely to be, based on two key variables of (1) the strategic importance of your offer to the target customer and (2) the proportion of its overall budget the target customer places with you.

   

    

7. Communicate the ROI of your proposition

   Key to value marketing and selling is moving the conversation away from transaction price. As well as articulating the outcomes and benefits of the offer, we should also talk about return on investment. If you are selling a more expensive industrial pump than your competitor, how much will the customer save in reduced downtime? If you are selling marketing communications services, how much extra revenue do you think you will generate and why? Most b2b purchases are made with ROI in mind. We must communicate our offers in terms of quantifiable units and, if possible, in financial terms. And we must be absolutely credible in doing so.

    

8. Never bargain

   It is impossible to market and sell an offer on a value basis long-term if you submit to requests to ‘do a deal’. Willingness to bargain by definition reduces the perceived value of the offer in your customers’ eyes, and in business-to-business markets word travels fast. B2b marketers often justify their willingness to bargain on the grounds that their product is perishable. This is particularly the case in the quaternary and quinary businesses, who are essentially selling time. However, bargaining on hourly rates is a sure way to make your entire proposition perishable and create a ‘race to the bottom’ in your market. Even reducing your offer to reflect a lower price is fraught with difficulty. Value selling works when a coherent package of benefits is communicated. Deconstructing this package into its component parts reduces the coherence of the offer and removes the synergies achieved by putting a package of complementary benefits together. Losing these synergies further devalues the offer in the eyes of the potential customer.

    

9. Remember that for most b2b buyers, it is NOT all about price

   Data gathered over 15 years at B2B International shows clearly that the average proportion of any market that prioritizes price over all other issues is 20%. 80% of business-to-business buyers do not prioritize price. In other words, price-focused salespeople are leaving value on the table in 80% of cases! Even in highly undifferentiated markets such as utilities, fewer than half of buyers prioritize price. The myth of the price-focused market is perpetuated by simplistic b2b salespeople who only know how to sell – or only want to sell – on price.

    

10. Be prepared for a cultural change

    The biggest challenge of value selling and value marketing is that it can only be achieved if it is deeply embedded in the company culture; part of the DNA of the business. However, in most b2b markets, the limited size of the target audience means a labour-intensive marketing and sales process; with a heavy emphasis on salespeople, volume and short-term results. Value marketing and value selling require a reversal of this approach, with marketers joining salespeople as the ‘heroes’ of the b2b business, profit supplanting volume as the number one KPI and a longer-term outlook communicated from the top of the business.

     

The post Value Marketing & Value Selling In B2B Markets appeared first on B2B International.

A popular tactic is to cut prices in the belief that this is the principal motivation influencing buyers; there being little to choose between other features such as quality, delivery and service. The unfortunate result may be a price war, as competitors retaliate in an attempt to maintain market share. It is our contention that to sell non-differentiated products chiefly on a price platform, is both economically disastrous and unnecessary. This article seeks to show how to avoid price cuts by adopting a more professional and profitable marketing stance.

What We Mean By Commodities

For most purposes non-differentiated products can be defined as those which are made to a common standard and where the consumer sees little difference or advantage between them. They are also often, but not always, characterised by a low requirement for service, they tend to be purchased regularly, have a minimal superficial design content and a low level of brand loyalty. Perfect examples of non-differentiated goods are commodities which are graded for quality according to agreed international standards. Copper, wheat, cotton and coffee are all non-differentiated products whose prices are determined exclusively by supply and demand.

Our interest lies one step beyond commodities, in products which are marketed by companies as opposed to being sold at exchanges or auctions. The fact that a product is marketed means that an element of service is involved and a degree of differentiation is introduced. The reason for this is obvious: there are few circumstances in which buyers select goods for their own sake and pay no regard to delivery and service. Research has shown beyond doubt that buyers find it hard to separate in their mind a company’s image from its products range. Thus, once a product is marketed, it or the company will develop a personality which to a greater or lesser degree can be differentiated from competitors. For this reason it could be argued that there is no such thing as a non differentiated product. In the harsh world of reality however, most marketers have faced situations where buyers consider the wares put before them and claim they are no different from others in the same class.

The Challenge For Marketers

There can be no denying that in the eyes of buyers non differentiated products do exist, and marketing managers must consider every means open to them to avoid competing on price. Products move through a value chain in which the level of non-differentiation decreases. At one end of the spectrum iron ore, pig iron, billets and rod are non-differentiated, whereas at the other, machine tools are quite clearly seen as very different within their own genre.

Manufacturing processes are seldom identical even though the end products appear the same. The first place to look for a differentiating feature is in the raw materials, the processing equipment, utilisation of labour, or processing control. Sales stories are not hard to find if every aspect of the manufacturing process is examined. For example, specially selected steel qualities guarantee uniformity in the manufacture of pressings; modern rolling plant ensures closer tolerance in rod production; a large inspection staff produces goods with fewer rejects.

It is especially important in industrial markets to draw the buyer’s attention to an element in the company’s manufacturing process which suggests its products are of a higher quality than those produced by competitors. Decision makers whose job it is to specify which companies’ goods should be purchased span a number of disciplines. Technicians are frequently represented in the decision process and they are especially concerned with quality. Professional buyers stake their reputation on their suppliers and so, whilst more concerned with price than technicians, and recognising the importance of quality – to them it represents value for money and job security. Even buyers with the largest of purses, such as those employed by the motor vehicle manufacturers, believe it is imperative to obtain components in the right quality and quantity with price ranked third as an area of interest.

The marketer does not need a unique feature in order to differentiate his product from the competition. Indeed, the feature which is sold to the customer could be imaginary as long as it is seen as a benefit peculiar to that product. Research has shown that motorists say there is little to choose between the quality of different brands of petrol, and yet many manufacturers have managed to achieve differentiation with nebulous promises. In the past, campaigns such as National’s freedom of the road, Shell’s economy and Esso’s tiger in the tank successfully differentiated these commodities. Today the emphasis is on convenience and food – but the effect is the same, the brand is emphasised and attention is deflected from price.

This process of building up brand consciousness is well recognised in consumer markets, much less so in industrial sectors. Nevertheless a few industrial companies have achieved a very high level of product awareness. Most buyers of ready mix concrete think of RMC first; and associate steel shelving with Dexion. In each case the product is undifferentiated and yet many buyers regularly place orders with these market leaders, despite price cutting by competitors. Buyers are thought to be totally rational in their selection of suppliers, whereas in practice habit, loyalty, security and ignorance play an important part.

Manufacturers of non-differentiated products are frequently their own worst enemy. In the belief that products are bought chiefly on price, they employ order-takers rather than a professional sales force. The lack of sophistication of the representatives in the field means they are unable to counter pressure exerted by buyers to reduce prices, and the result is lost business or a trimming of margins to the bone. In contrast, a high quality, well trained sales force carries with it an image which rubs off on the product itself. Furthermore its selling ability ensures sales are not lost on price without a fair fight.

Differentiation Strategies

There may be an opportunity to differentiate products by making design changes which in no way affects performance. Many years ago Esso introduced a blue dye to their paraffin and Aladdin coloured theirs pink. These standard products were immediately recognisable from competitors. The scope for changes of this kind in industrial markets is great. Traditional dove grey steel shelving could be brightened by colouring it orange which would cost no more. Similarly, the outer covers of industrial cables would be more noticeable and therefore safer if they were made in distinctive colours.

Differentiating consumer goods through the use of packaging is well understood. Industrial companies should not ignore its many possibilities. The Japanese were quick to identify a problem that faced companies purchasing wire on returnable spools – the normal method of packaging used by UK manufacturers. The traditional spools are large bulky items to manhandle, require expensive storage space and involve both the supplier and consumer in much paperwork. Japanese manufacturers designed a lightweight tubular version which reduced transport costs, made handling easier and could be discarded after use.

Service is another common and highly desirable feature which is used to differentiate products and companies. Buyers select a package when they opt for a supplier, and one element is service. This is often given a low score when buyers are asked its ranking in the decision making process. However, service tends to be taken for granted under normal conditions and is only noticed or appreciated when things go wrong. Service is a broad concept but in reality it describes the ability and willingness of a supplier to bend over backwards to help. It includes the speed and efficiency of sales staff in dealing with enquiries and orders, delivery performance and the supply of technical help should this be required. The possibilities of differentiating products by selling service are endless.

A manufacturer of chain link fencing instigated a programme of back-selling to local authorities as a service to his distributors with a resultant increase in sales and customer goodwill. A fibreboard supplier held one day seminars in numerous cities to educate his customers in the technicalities of the product’s manufacture and also to raise its image.

In Conclusion

Seeking unique product benefits, whether actual or imaginary is an important means of separating a product from the crowd. Heavy advertising and high quality salesmanship puts the product on the tip of buyers’ tongues and ensures its image is held high. Design changes of colour, shape or texture, can provide a distinctive feature differentiating products thus moving them off the price treadmill. Rethinking the method of packaging for even the most basic raw materials is an effective differentiating tactic and may well result in positive benefits to the user which command a premium price. Finally selling service in its widest context is an opportunity to divert attention from the product itself and show how the package that is being offered is superior to all others.

Differentiating the non-differentiated product is less easy than price-cutting. It requires flair, hard work and a full understanding of the market. But it is much the more profitable option.

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The strategy of cost cutting, whilst intuitively making sense, is usually a road to ruin as some smarter competitor, often working from a new geography with a lower cost base, undercuts you. Very few companies can sustain the cost advantage for long. Equally, attempts to increase sales by any means such as ramping up the promotions (or cutting costs) or increasing the value added, takes considerable time. In fact, raising prices has to be seen as the easiest option to give more profit.

Therefore the big question that needs answering is this: “if the price is increased, will sales volume decline and if it does, will it be more or less proportionately to the rise in price?”. No company wants to leave money on the table and so obtaining the optimum price has always been a key issue to marketers. However, asking customers to quantify the price they would be willing to pay for a product or service is one of the hardest questions for any researcher as the customer may not feel that they can answer such a question or if they can it may not represent their true actions if such a price was introduced to the market.

This paper explores these quandaries and lays out some principles of pricing research.

The Basics Of Pricing

Testing the price acceptability of a product or service in comparison to the competition is the main principle of any pricing research. The basic law of demand is the relationship between the price people or companies want to pay and the amount they want to buy. However, the relationship needs to be carefully considered in business to business markets because the rules differ considerably according to whether the product is a commodity (grains, minerals, metals, etc.) or manufactured. We can recognize a simple supply and demand curve that illustrates output will settle at an optimum price.

Pricing In Industrial Markets

Commodities within any one group are totally undifferentiated; they are classified according to a standard such that their price depends upon supply and demand. Speculation about a shortage of the commodity or the belief that it is an investment hedge will have short term and maybe dramatic effects on the price. As the commodity becomes processed into cement or steel, it gains value, and the sophistication of the processing method enables a premium price to be charged. As the design element of a product increases and the value of the raw material becomes less important, so pricing becomes more complex. The price for design skills is more difficult to pitch.

A product with a considerable element of design becomes “differentiated” from those with which it competes, and buyers are faced with the problems of placing a value on the various benefits on offer. Normally a differentiated product allows the seller to take advantage of the multiplicity of features and charge a higher price. This is not to say that the customer is insensitive to price – rather that he perceives differences in the choice of products available and selects one which best meets his needs. However, the price elasticity, or the level to which demand changes with a price change, may be quite low with differentiated products. This may be because of the uniqueness of the offering but it could also be because of difficulties of switching industrial products. Getting a new product specified, changing the inventory and persuading the users in the company that the new product is just as good may introduce a serious level of inelasticity.

Of course, design is only one factor which buyers evaluate when considering the price of a product. They will also attribute a value to after sales service, reliable delivery, speedy delivery, quality, longevity as well as the brand. A strong brand gives the buyer confidence and enables companies to command a premium price even if the products are similar to the competition. Any pricing research needs to take these factors into consideration.

How Can Research Help?

The link between prices charged and volumes sold is not a hard one to grasp; the difficulty arises when the question is asked – With an X% price increase, how much will it affect our sales? A price increase may result in a customers reduced consumption, switching to a substitute product or stop buying your product altogether. On the other side of the coin, your company may be missing the chance to gain additional profit through charging more – it is all down to customers’ value perceptions and what they will pay.

When looking at pricing strategies, information on customer value, the market competition and costs are all paramount to the customer value created and whether the given price can be sustained. However, taking all this into consideration still doesn’t help us place a value on customer inertia and product or company brand. Therefore, pricing research should be seen more as a tool to confirm assumptions rather than scientifically pinpoint exact market dynamics.

First Steps In Pricing Research – Desk Research

The first question that needs to be asked before commissioning any piece of pricing research is; are there any past indicators of what has happened to sales figures when prices have changed in the past? Historical data can give useful clues but needs to be handled carefully, especially if a price change resulted in negligible volume effect because competitors’ prices may have moved in line at the same time. It is therefore vital when looking at past price data that awareness and knowledge of the competition’s past pricing strategies is available. Another problem with historical data is that it is just that, past data. We are interested in predicting future trends and changes and the relationship between price and volume established in the past may not hold true with different market forces. However, a scatter graph of prices paid for customers buying different volumes has to be a starting point in gauging the slope of the demand curve.

Primary Research – Different Pricing Techniques Used

Primary research is based on customers’ predictions of what their possible actions would be if a price increase/decrease was to take place. It is one thing asking the customer how much extra he or she will pay for a new and improved product/service but in the cold light of day, will that person put their money where their mouth is?

Due to the hypothetical nature of such questioning caution needs to be taken with any research conclusions.

Various research techniques have been developed to overcome nuances in the data collected and so giving more robustness to research recommendations.

The only sure way of obtaining accurate price elasticity information is to carry out a test market – in other words to create a situation where customers are exposed to real price changes with real demand pressures. This is almost impossible to engineer and so we use the best alternative that was developed by two economists ( Gabor Granger ) in the 1960s. Customers are asked to say if they would buy a product at a particular price. The price is changed and respondents again say if they would buy or not. From the results we can work out what the optimum price is for each individual and by taking a sample of customers we can work out what levels of demand would be expected at each price point across the market as a whole (the demand curve in the following diagram). Using this estimate of demand, the price elasticity (or expected revenue) can be calculated and so the optimum price-point in the market established.

A more sophisticated variation of the Gabor Granger technique is called Van Westendorp pricing. Price Sensitivity Measurement (PSM) was devised, in the 1970’s, by a Dutch psychologist, Peter van Westendorp. This technique uses four questions about a product or service and requires the respondent to rate each price on a scale from too cheap to too expensive.

The respondent is asked the following four questions concerning a product or service they could receive at various different price rotations:

1. At what price would you consider this product/service to be cheap?
2. At what price would you consider this product/service to be too expensive?
3. At what price on the scale would you consider this product/service to be priced so cheaply that you would worry about its quality?
4. At what price would you consider this product/service to be too expensive to consider buying it?

Analysis of the data yields several distributions shown in the following diagrams. Various intersections on the curves yield inputs for pricing decisions and the resultant price difference helps to determine the pricing options that can be used.

The Indifference Price Point (IDP) is where the number of respondents who regard the price as cheap is equal to the number of respondents who regard the price as expensive. According to Van Westendorp, this generally represents either the median price actually paid by consumers or the price of the product of an important market leader. IDP is based on customers’ experiences with price levels in the market and will change with market conditions.

The Optimum Pricing Point (OPP) is the price at which the number of customers who see the product as too cheap is equal to the number who see the product as too expensive. This is typically the recommended price.

The range of prices between the Point of Marginal Cheapness (PMC) and the Point of Marginal Expensiveness (PME) is the Range of Acceptable Prices for a product. According to Van Westendorp, in established markets, few competitive products are priced outside this range.

Pricing a product is one of the most challenging decisions marketers have to make. The problem is even larger when a price is needed for a product that is conceptually new. Because customers are not familiar with it, benchmarks for price are not available and the purchasing decision is an unknown quantity. A price too high would scare would be customers off while un derestimating a product’s value can be a costly mistake, since the introductory price often fixes its worth in the buyer’s mind. It is therefore crucial that a larger than normal sample size is used so that all findings are statistically robust. For many companies, this can make pricing research expensive, unless combined with a range of other measurements that can establish where customers would welcome an improvement in either products or services and what premium they would pay for those improvements. This type of research looks at what the opportunities are for up-selling (obtaining more value for the products and services) and where there are unmet needs that a company could exploit by making a more attractive offer.

Conjoint Analysis – Trade-Off Research

In the 1960s and 70s, academics were looking to understand how people made decisions. If you just asked people, they tended to say what was top-of-mind, or what they thought the interviewers wanted to hear and so what people said didn’t necessarily reflect what they actually did.

However, the academics noticed that almost all choices involve compromises and trade-offs as the ideal is rarely attainable (we might want a Rolex watch, but we typically have to compromise to something a little less expensive for example).

In their studies, the academics found that by looking at how people made selections between a limited number of products involving different trade-offs, they were able to accurately predict which choices would be made between previously untested products. Conjoint Analysis was born and is based on the understanding of how people make choices between products or services, so that businesses can design new products or services that better meet customers’ underlying needs.

To understand how conjoint analysis works, we need to be able to describe the products or services consistently in terms of attributes and levels in order to see what is being traded off.

An attribute is a general feature of a product or service – say size, colour, speed, delivery time. Each attribute is then made up of specific levels. So for the attribute colour, levels might be red, green, blue and so on.

For example, we might describe a mobile telephone in general terms using the attributes, weight, battery life and price. A specific mobile phone would be described just by levels say as 80 grams, 8 hour battery costing £150.

Conjoint analysis takes these attribute and level descriptions of product/services and uses them in interviews by asking people to make a number of choices between different products.

For instance would you choose phone A or phone B?

In practice you can see how difficult some of the choices can be. The thought process might be:

“Phone A is bulkier, but has the battery life and lower cost, but Phone B is smaller and neater yet more expensive and with lower battery life. Lighter weight is worth more than the loss of battery life, and it’s probably worth the extra £20, so I’d choose B in this instance.”

By asking for enough choices (and with good design to minimise the number of choices you need to ask), the researcher can work out numerically how valuable each of the levels is relative to the others around it – this value is known as the utility of the level.

The problem for business researchers until now has been the cost of carrying out conjoint analysis. In order to arrive at reliable results it is necessary to carry out at least 100 interviews and we feel more comfortable with 200 or more. These interviews have to be face to face so that respondents can view the concept cards and make their choices (in practice the choices are usually presented on a laptop computer screen). Think 200 face to face interviews scattered across Europe and you are thinking €300,000+ survey cost. For many companies this will break the market research budget. However, the same project carried out on line could be carried out for a fifth of the price. The conjoint on-line interview would use the telephone to recruit and qualify the respondent and collect base data while the conjoint choices are made by the respondent in a self-completion interview that is e-mailed back to the research company.

SIMALTO – Simulated Multi-Attribute Level Trade Off

Trade-off grids are an approach to collecting information from respondents that recognises that an individual customer cannot have everything. He or she has to make trade-offs to get the best product they can buy. The classic trade-off is between price and quality, but in practice when considering most purchases we make trade-offs between different features and service levels and even emotional risk.

A trade-off grid is a method of getting underneath a customer’s general wish list to really understand what they must have and what are the nice-to-haves. This means we can see what is really valuable to a customer and with a few further questions, we can also understand what their priorities would be for trading up or improving the current system.

The factors that a customer may be interested in (also called attributes) are laid out on a grid showing different levels – low levels of the attribute at the left rising to higher levels towards the right hand side of the grid. With the grid, we can then ask the respondent to complete a number of tasks. Typically the first task is to find out where he or she would want a “first class supplier” to perform – this sets the ideal standard. Next we can ask where your company is currently performing. We can then ask them to do a number of different things – for instance to prioritise improvements in your company’s performance one square at a time, or to ask questions such as if you had more of x, what would you be prepared to sacrifice from y.

Each level of attribute has a number which is used by the respondent in a “points spend” question where they are asked to show how they would spend 30 points (by way of example) to improve the offer they receive at present. The way that the points are spent indicates the trade-off that each respondent is prepared to make to move from one level of delivery that they receive at the present to one that could be offered (but at a higher price). This trade-off enables us to see specifically what a supplier could do to win more business and at what price. The outcome is thus a detailed understanding of where the customer would like improvements and what those improvements should be.

SIMALTO grids have the advantage over conjoint in being easier to apply in business to business situations. For example, we often have to test many attributes in business to business customer value propositions and this creates a complex task for the development of the conjoint choices. Respondents get tired in conjoint interviews which require them to make dozens and dozens of choices between attributes or to consider concepts, which, after the 30 th one has been shown, begin to look the same. Also, the output from a SIMALTO survey makes complete sense to a manager in business who wants to know what proposition should I go for and how much should I charge. They are saved from the black box mystery of the conjoint utility values.

The Guiding Hand Of The Agency

With product life cycles shrinking, customers becoming more sophisticated and demanding, and tougher local and even global competitors emerging in most markets, markets are shifting at faster rates than ever. The payoff for getting your company’s pricing strategy right has never been more important.

Pricing research usually concentrates on customers’ sensitivity to pricing. This price sensitivity is driven by the nature of the market, the competitive environment, the target within that market, the differentiation level of the product or service, and the value of the brand.

The responsibility of any research agency is that of the being a realist. The subject of pricing research is an emotionally charged area and who can really say what a customer will do until it comes to them actually putting their hand in their pocket. We need therefore to have the confidence to say that a specific price is the one that respondents have stated they would buy at – but we know that it is all hypothetical and that sometimes a ballpark is needed to enable a test market experience so to gather buying patterns on how buyers/users will react.

Pricing research can be used to obtain an understanding of the pricing levels for specific product service offerings. It can also be used to attain an understanding of the additional services customers subscribe to and what additional price they would pay, to identify the elasticity of demand for a product or service and t o establish where customers would welcome an improvement in either products or services offered and what premium they would pay for those improvements.

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