For our August Webinar, Tim J. Smith, PhD, walked through best practices for clarifying value propositions, setting your prices from those value propositions, and leveraging that value story into new country markets. To conclude the webinar, he answered some questions from the audience. Here is part two of his live answers, which are focused on pricing-specific challenges organizations face during the product launch process.
As you think about identifying list price, what elements of that process enter into setting policies for discounting price in execution?
It’s not a one-size-fits-all answer. Sometimes you find out, from the economic value to the customer, that you have a very unique product, and therefore you should not need to discount it; your target segment should pay the full price, so you decide that you will never discount. Other parts, you’ll find that you’ll add discounts and rebates, due to the idea of trying to hit other segments of the markets. This is why the economic value to customer to market segment orientation study is so key because it tells your salespeople where they can capture a good price, and where they should perhaps walk away.
That’s half of the answer, the other half is when you start doing discounting and rebates, you’re moving out of price setting and into commercial policy. For instance, maybe you’re at Grainger, and you always give GE x% off on everything they order, but my wife, who’s an artist in Bulgaria gets nothing, because she’s a single artist in Bulgaria right now. That’s a commercial policy decision about how you’re going to penetrate your market and manage your channels. This is separate from price setting, which is about segments and prices.
The key challenge of Voice of Customer is that in case of a breakthrough innovation, the customers will not see and understand the value to be delivered. And if you try to explain it, the phrasing of your value story will dramatically influence the customer feedback you are getting, What do you recommend to do in such a case?
Blue ocean, breakthrough innovation, is exactly where I want to be having more conversations. I want to focus on the problem I’m solving, and the value of solving that problem. Breakthrough innovation, I have to admit, the end customer usually doesn’t fully get what you are doing. When you showed me the first iPhone, I had no idea why I’d want such a thing. Now, I can’t imagine living without one. The problem is how we explain the value and benefits to the customer at the end of the day. That’s why research design is key, because you’re focusing on the problem being solved, not what you’re selling. By focusing your research on those things, you can get better insights. That’s half the answer.
The other half of the answer is that Van Westendorp and Gabor-Granger are proven in marketing academic circles to not be good price optimization tools. They are only good at telling you price expectations. The Economic Value to customer approach has been proven in academic circles to work; to get you in the right ballpark in terms of price.
When I do research, often internal salespeople (before start will give you asking what the price is), will guess (the optimal price) to be, say, $5. If you use Van Westendorp or Gabor-Granger, you find the right price to be something like $10. If you use Economic Value to Customer, you often see something like $18 – even after giving 70% of the differential value to customers. Those are pretty different numbers.
That’s when management needs to step in and ask if we can we convince our customers that this is worth $18? Or if we start at $18 and then drop it to $15? And then I have to convince the sales people that this is worth at least $10 and maybe $18, so I have to do some internal selling of the value proposition.
Could you elaborate on when you have seen Gabor-Granger and van Westendorp done well? Also, do you have a preference on which method to use?
I do prefer Gabor-Granger. I have seen them done very well, I just know that they won’t get me the right price. That’s a separate question. One example I can talk about clearly is my sophomore class I teach every fall at DePaul in Quantitative Marketing. I tell my students to do a survey and ask what price a bowl of Chili would be considered a bargain, what price would you consider expensive, what would you consider so cheap you would question the quality, and what would be so expensive that there would be no way you would be fine. After 300-600 surveys, we do the lines and we get a price, and every year, the price of a bowl of chili is between $3 and $6. But I simply could have looked at the price of a bowl of chili across the street to discover that.
What price should you charge for a bowl of chili? That’s what I argue with my students every year. If it costs me $2 to make a bowl of chili, why would I charge $3? Why not $6? In business practice, I’ve seen similar results. Both of these methods tell me the expected price, but it’s not a true reflection of willingness of customers to pay. Conjoint analysis offers two offerings at two prices, and asks which do they want? That confronts the customer with a real decision-making process.