Every day most of us make several complex trade-off decisions based on our preferences, often sub-consciously. Each morning some of us either choose to drive ourselves to work, walk, cycle, take the bus or call a cab or even hire a chauffeur-driven limousine. At lunchtime we may choose to dine at an exclusive restaurant, visit the local café, take a sandwich at our desk or skip lunch altogether. Some of us can only afford to access some of these options, some people can afford to access all available options but have other restrictions. For instance, even if all the above options were available at exactly the same monetary cost, not every consumer would choose the premium offer. Imagine the wait for a limited number of limousines or the queue outside the now reasonably priced top class restaurant!
So supply and demand or rather availability is a choice attribute. But what if all the equally-priced options were in plentiful supply? Still some consumers would choose to walk to work because they value their health and fitness highly or they might place more value on picking up their kids from school and so choose to work through lunch hour to finish work early. Even the perceived benefit derived from arriving for work in chauffeur-driven style or dining in opulent magnificence has some associated perceived cost. So whilst both price and the supply and demand of goods and services are important choice components, they are neither comprehensive nor universally important to the same degree.
There are generally three price elements to consider::
1. Price position What is the product price relative to the next best i.e. competing alternative?
2. Price elasticity How does the product or service price vary its market demand?
3. Price value What are the benefits of purchasing at a particular price versus the usage costs incurred?
For B2B businesses that have moved beyond cost-plus pricing the first two elements are relatively well understood and deployed. Most B2C businesses, for example retail, know the “utility” benefits and dis-benefits of product features – including brand – and incorporate them into the price. However, the service element – after-sale service – is not usually a high utility component except for big spend items. Conversely, for the majority of B2B industrial product businesses, those that provide industry with combined Product-Service support the service value element of the offer is rarely well understood. The result of a recent survey of buying behaviour in the chemical industry illustrated the difference between suppliers’ prediction of their customers’ needs hierarchy and the reality. However, what it omitted to explain is that this a comparison of averages. From my experience needs hierarchies will differ radically between different customer segments.
Just as part of the population would choose a chauffeur-driven limousine and fine dining each day whilst others would see a greater value in walking and in skipping their lunch break, there are some B2B customer segments that need few added “frills” whilst others derive signmificant benefit and hence perceive a higher value for access to technical knowledge or innovation focussed on cost reduction and would willingly pay a premium to secure these services.
Market-led B2B businesses are successful in measuring the value of benefits derived from a Product-Service offer by different customer segments and in differentiating the service level pricing so, whilst the needs of the customer are met, there is also an equitable share of the value jointly created.
Every day most of the population sub-consciously make multiple cost-benefit trade-off measurements. For instance, when choosing how to arrive at work or where to have lunch. In the same way industrial buyers make trade-off decisions to balance conflicting demands. Some elements of the offer are screening criteria i.e. “must have” components, other elements are differentiators – selection criteria which are applied where all selected suppliers meet the “must have” criteria – and the lower hierarchy elements are either “nice to have” or unimportant. The point is, different customer segments have very different needs hierarchies so any Product-Service supplier would do well to measure the needs hierarchies that exist in the markets they serve. A well designed conjoint analysis is the most cost effective method of measurement because it mimics the trade-off process made in everyday buying decisions. Conjoint analysis is a technique that employs independently managed customer interviews. By asking interviewees to choose between several different Product-Service combinations, a conjoint analysis of the choices made can measure the benefit (or utility) perceived by interviewees for the individual – yet conjoined – elements of an offer.
By including a price element in a well-designed conjoint analysis study, not only can a perceived monetary value be derived for each element, but new Product-Service configurations can be identified, which may be more attractive to particular customer segments. Most importantly, the size of attractive customer segments i.e. those customer segments that can be served most cost-effectively by a particular supplier, can be identified and a suitable Product-Service mixcan be selected with an appropriate price position.
Call Pennog on +44(0)1484 443001 or contact us using our easy contact form for support in calculating the real monetary value of your offer relative to your competitors and for the different market segments your business serves.