Pricing changes and new pricing decisions are a tricky business, and capturing customer input is important.
The data should be treated more like a range than a finite point. It should inform but not necessarily driving pricing decisions.
How should customer input on pricing decisions be sought?
One important caveat is that customers can intelligently comment on price points, but not necessarily on pricing strategies, so seeking their feedback on prices and then inferring the meaning in terms of structures and approaches is appropriate.
And one important distinction to make off the top is whether we are talking about an existing offering with a price that might be changed, or about a new offering where price must be developed.
Existing offering
We are doing some work in the HR space right now. A client said to me last week: "In the past when we have asked about how our customers feel about our pricing they usually complain we are too expensive."
The prevailing perspective is typically that customers will always want lower prices. So asking about current prices will result in negativity, and asking about future prices is ineffective. It is true that customers will want lower prices – free is always the preferred price – but want and willingness to pay are not the same.
The missing element here is context. Customers must be provided with it to generate meaningful data.
For example, asking customers about their perceptions of value-for-price relative to competitive offerings is a better way to assess current price satisfaction than asking straight-up whether they are happy with current pricing. And being very transparent about what features, benefits and additional value is associated with each increase in price will provide enough context to fight the customers-always-pick-the-lowest-price problem.
New offering
Seeking customer input of pricing on new products or services is difficult, and often regarded as speculative "crystal-ball watching" at best. Again, this is not true. But the techniques to gather the feedback and associated demand-per-price-point data are quite technical.
One technique, which is aimed more at understanding an acceptable price range – sometimes loosely referred to as the price sensitivity of an offering, although it doesn't measure willingness but rather perceptions – is Van Westendorp analysis.
Van Westendorp is typically used when price points have already been proposed, to understand where the acceptable range of prices determined by customers falls versus the proposed prices. It asks customers a series of four simple questions about when prices are too cheap to be considered plausible, a bargain, getting expensive and too expensive to purchase – and then computes an acceptable price span.
For example, Van Westendorp will tell you how far above or below the range consumers are willing to pay for a product or service – and therefore how much additional revenue you either stand to lose or gain with your price, or how much to adjust the price to get into range.
Another technique that helps to build bundles and inform actual price points is conjoint analysis. A conjoint is forced trade-off analysis, and it is considered a more reliable method of predicting acceptable price points than the traditional select-from-list method. Conjoint is normally used in situations where there are multiple attributes to assess (such as model versions of cars), the attributes have multiple levels (such as trim packages), and prices must be attached to each attribute and level.
Choice-based conjoint is a type of analysis that works by showing customers subsets of products that contain multiple attributes, and asking them to select only their most preferred offering. It then computes the price associated with the most preferred variation – often interpreted as a bundle.
One final benefit of technical approaches to understanding price demand, such as Van Westendorp and conjoint, is that they can help surface psychological price ceilings, where value matters less than the cash flow impact for the customer.
Special to The Globe and Mail
Mark Healy, P.Eng, MBA, is a partner at Satov Consultants – a management consultancy with practice areas in corporate strategy, customer strategy and operations strategy. Mark's focus areas inside the customer strategy practice include consumer insights, customer experience, innovation and go-to-market strategy. He is a regular speaker and media contributor on topics ranging from marketing to strategy, in telecom, retail and other sectors. Mark is known as much for his penchant for loud socks and a healthy NFL football obsession as he is for his commitment to Ivey and recent Ivey grads. He currently serves as chair of the Ivey Alumni Association board of directors. Mark lives with his wife Charlotte and their bulldog McDuff in Toronto.
Mark Healy