The Role Of Research
The importance of research in any pricing project cannot be overstated. The purpose of the research is simple: to understand in detail the value and decision drivers of your buyers and how that affect their willingness to pay for, and buy, your product or service and for those of your competitors.
But we are not talking about traditional, shallow market research that often, it's an academic exercise that obscures more than it enlightens, misses important details, understates the differences between market segments, and overstates the role of price in the buyer's decision-making. Instead, a pricing research that details the decision landscape, perceptions, preferences and willingness to pay and to buy of both customers and non-customers, and includes intelligently-developed customer segmentation frameworks.
A technique used in research to determine how people value different features that make up an individual product or service.
The objective of conjoint analysis is to determine which combination of a limited number of attributes is most influential on respondent choice or decision making. A controlled set of potential products or services is shown to respondents, and by analyzing how they make choices between them, the implicit valuation of the individual elements can be determined. These implicit valuations (utilities or part-worths) can be used to create market models that estimate market share, forecast revenue and even profitability of alternate designs of the offerings.
Value Attribute Positioning
Different market segments have different perceptions of quality and value for money for the brands tested.
A product or service can be described by a number of value attributes and benefits. Customers evaluate the product or service on these and other attributes when making a purchase decision. Value Attribute Positioning is particularly important when understanding how to position the company to gain market share, as both satisfiers and dis-satisfiers of different brands and of different market segments can be measured.
Assess the Attribute Importance Weights
Using K-Means Cluster analysis, different behavioral market segments are identified in which each segment has a different decision landscape, value profile and willingness to pay
When developing a customer intelligence platform, it becomes important to gain insights showing which attributes of a product or service offering are most highly valued.
Identify Customer Segments
Customers are not all alike. While there may be some trends that are common to all customers, often segments will emerge with different attribute importance weights. This methodology will not only allow you to identify different customer segments by importance weight, but also to size them to predict the profitability of a specific segment. Then the data can be used to generate compelling value propositions for each segment based on their preferences.
Determine Attribute Performance
Both the company and its competitors are then rated by customers on their performance along the identified attributes to capture the respective customer perception of each attribute.
Calculate Perceived Value
The perceived value of a product is calculated by taking the average of the product’s perceived performance attributes weighted by their respective importance weight. This simple weighted average is an all-inclusive mechanism for comparing one product against another. Perceived values can be calculated and examined for the whole market or by specific customer segment by using the importance weights for a specific segment.
Calculate the Perceived Value per Dollar
By plotting Perceived Price Value as a function of existing prices across all competitors, we can identify the perceived value per dollar at each price point. The derivative of this curve gives us the change in perceived value per dollar change in price. This curve and its derivative will also indicate the degree to which the product is a luxury good, one that is more appealing because of the higher price.
Assess Competitive Position
By comparing the perceived values of one company to another, you can determine your current competitive advantage or disadvantage. This becomes a tool to use in order to leverage the dis-satisfiers into action that gain marketshare and pricing power at the same time.
Examine Marketing Strategy
Recommendations cannot be made without a thorough understanding of the marketing strategy. It is essential to determine the company’s short- and long-term strategy and capabilities. Does the company want to maximize profit? Revenue? Market share? Do they have the operational capacity to support more business or would quality be better with less?
Formulate Current Pricing Recommendations
The internal perception of what drives a client to make a purchase, compared with the actual perception of the marketplace, can often vary substantially.
By combining the Marketing Strategy, Perceived Value per Dollar, and Competitive Position, we can generate pricing recommendations. These recommendations can be made more rigorous by the use of various customer choice models that incorporate market share and purchase loyalty for consumables. However, we find this costly step often is not necessary to identify and exploit pricing opportunities.
Identify Non-Price Marketing Strategy Adjustments
This process will often capture opportunities to improve your market share. By comparing attribute performance across the industry, you can highlight opportunities to make strategy adjustments that will strengthen the perceived value of your product. These adjustments have resulted in improved sales effectiveness, increased market share, and greater profits.
There are almost always gaps in perceptions between the company and the market, different groups within a company, and customers and non-customers. These include perceptions of the value you bring and of your brand, about competing companies, consumers' willingness to pay, etc. These gaps, especially if large, make the company's go-to-market activities and business processes less effective than they can be. By spotlighting the gaps, companies can find ways to improve internal and external processes to become more effective and efficient.