Value Analysis as a Foundation for Price Setting

By Roberto Bedotto, European Pricing Platform – Italian Chapter Board Leader
- Summary of an article in a current issue of the magazine L'Impresa, one of Italy's leading business magazines -

The analysis of value and of the willingness to pay are core elements of the definition of the price strategy. The impact of a proper analysis was measured in several basis points, too important to be ignored.

The rationale of this approach is simple and well known: price is function of the perceived benefits, and of the next best alternative available to customers.

The benefits come from the performance of the product or solution purchased – and this is the area, which is most frequently analyzed -.

However there are at least two other areas for benefits, which are worth investigating.

The first one is linked to the Order to Delivery (and Payment) process, and the interaction between supplier and customer. Even in the most commoditized business, there are reasons why a customer buys from a certain supplier instead of another. Reasons which do not relate necessarily with the best price, but rather to the process of acquisition and fruition of the good/ service, and how this process triggers benefits (measured in money) in the customer.

The second area worth looking into is even softer, however it is well present in the purchase decision; it includes factors such as the reputation, or compliance with relevant legislations, or most importantly, the so called “brand value”.

The actual methodologies to measure value and the related price are well known, and  include for example the conjoint analysis method; they are anyway out of the scope of the present article. 

• I'd rather instead spend few more words on the actual usage of such an analysis, namely understanding which functions benefit from it; this can help the reader “sell” this analysis internally.The first usage is clearly the verification of the value/ price ratio of the goods/ services sold. A best practice in this respect is to involve both the customers and the sales force. Sales is our face towards the market, and shall be on board of the analysis and endorse the results with confidence. The best way to make this happen is to have Sales perform the analysis as if they were themselves customers. The outcome is that all discussions and opinions and emotions are replaced by the results of the analysis. The benefit for sales consists in a more structured and granular understanding of what makes the market segment tick, hence allowing for a more effective and tailored pitch to customers;
• Marketing Communication is another area where a proper value/price analysis allows to define relevant and impactful MarCom campaigns;
• Finally, Product Managers need support in defining the price during the new products development phase. And on the other hand, they also will be happy to understand which specifications of the offer can be eliminated for the sake of cost saving, without impacting too much the value delivered and hence the price.

Special thanks to the Italian Chapter Board members who contributed to the article.
Danilo Zatta - Simon-Kucher and Partners; Giancarlo Curro - Enel Energia; Paolo De Angeli - Syngenta; Raffaele Vitale - ValueLab; Stefano De Angeli - Fiat. 

Understanding The Willingness To Pay: The Key To Higher Margins ....

Understanding the value perception of the different value components for setting prices interpreted by the customer is very important information. Comprehending of this information leads without a doubt to many new insights into the willingness to pay.

Firstly, the main value components on which a customer evaluates a product or service needs to be traced. Subsequently, understanding the ‘utility’ per value for each component leads not only to understand the total value perception, but also into the proposition of its components by the value perception . This information is not only very important for optimizing a product concept, but also for putting the ‘right price’.

Alternative techniques to identify willingness to pay include the ‘Van Westendorp price meter BPTO (brand / price trade-off), expert interviews and market testing’. They all have their pro’s and con’s. Nevertheless, in most cases the conjoint analysis is been used. Conjoint analysis is an important technique to identify the willingness to pay. It is a methodology familiar for both marketers and market researchers because it’s also used for concept-testing. The enclosure of 'price', is relatively new in this method. Because ‘price’ isn’t actually a value component (there excist price and value. ...) this technique still leaves many question-marks.

Consequently, the issue has been arisen whether the conjoint analysis is a good technique to put into practice for achieving an optimal pricing.

Conjoint analysis is in fact a method used to measure consumer preferences: what are the important aspects of a product, and how important are these aspects in relation to preferences. In other words, what considerations are made when choosing a product? This technique is been used increasingly to find out, ‘how much one is willing to pay for a particular item?’. At this moment the customer is also asked for a value-proposition compared to a price review. For example, suppose a consumer must book a flight and can choose between ‘a flight with little room left for his/her legs, and a transitional flight for a price of € 200’ or ‘a flight with plenty room left for legs and a direct flight for € 500’. Herewith, conjoint will learn the importance of each value component: legroom, direct vs. non-direct flight and price. Moreover, assessing the price sensitivity is much more interesting to identify as well. For example, what happens when ‘the cheap flight with little room left for legs’ becomes 10% more expensive. Plus, how much more are consumers willing to pay for a direct flight. These insights can also be translated to a potential impact on revenues and profit margins.

Problem noted by critics is that price is not a real component value. Price is compared against value. Therefore, a conjoint analysis could be recognized as a good technique to measure price sensitivity and willingness to pay? The answer is yes, if the technique is correctly applied and the results are interpreted on a correct manner as well.

Do you want to find out more on how deterministic mining the right price for a product can help you to increase realizing profitability for your company? Then join us on the workshop: 'Value-based pricing' on the 21st of April at Blauw Research - Nuremberg. Language of the workshop will be German.

For more information:

http://www.pricingplatform.eu/site/public/workshops_detail.asp?id=70

Or feel free to contact Britt Dejager (britt.dejager @ pricingplatform.eu) when interested to attend on this interesting workshop.

The European Pricing Platform (EPP):

The first independent and 'Non-Profit' European network and platform to support focused pricing decision makers over a variety of industries and sectors. Our target is to update the pricing know-how of the business manager. Our mission is to be the on-and off-line place for international pricing / business decision makers in a wide range of industries. The interactive sharing, collecting and development of pricing knowledge are the key elements.

Source: Pol Vanaerde - ePP President