April 9, 2013
I heard a clip of a movie in which two men were discussing the sale of a business. After the “handshake” moment, these egomaniacs each wanted to have the last say. Let’s imagine the agreed purchase was $500m. The buyer said something like “I’d have paid $600m”. And the seller said “I would have taken $350m”. This got me thinking about willingness to pay, as a pricing topic. It strikes me that it’s the holy grail of commercial activity – especially in B2B; crack this, and you’ve got it made.
Econ 101 tells us about price elasticity, but in the B2B space, we know that demand is derived and the picture is much more complex.
We also know that our customers are sophisticated creatures, with good data on prices paid, all stratified by various factors. They use this information against the seller during the procurement process. We also know that individuals in procurement roles have variable compensation based on savings generated from suppliers – further shifting the balance of power in the relationship. So it won’t be simple to do; certainly not as simple as asking your buyer how much they’re willing to pay.
(as a side note, salespeople in car dealerships are very good at establishing willingness to pay, I would submit; it’s one of the first things they ask)
So what signals do we have about willingness to pay, and how can we harness the information we get? Here are a few that spring to my mind:
- Price increases wholly successful (may need to look by segments or end-use industry or geography)
- High share of customer wallet
- Co-development of new products or services
- Few viable competitive products
- Customers willing to be references for your product or service
- Loyal customers (measured by churn, or lack thereof)
If you’re in a commercial function (sales, marketing, product management, pricing), how are you assessing the willingness to pay of your customers? Are you doing it at all? Is it a defined activity, with a formal process and measured results? And if there’s nothing like that happening in your organization, do you think it would be worthy of exploring?
When you have some preliminary findings, then what next? What should a firm do with these insights? Well, the key is to develop those stratified customer attitudes to your products and services into differentiated pricing. That’s when you can start getting really profitable.
Just as in any properly scientific endeavor, the hypothesis should be tested. This should be on a small-scale, in a controlled environment, so that the results can be isolated and confirmed to a level of confidence that is acceptable to the organization.
Let me say, understanding and quantifying willingness to pay won’t be easy – but no great achievement is ever easy. If it were easy, it would have been done ages ago. But isn’t it time now?
By the way, I don’t recall the name of the movie I mentioned; I heard it on a movie review radio show I get by podcast. So if anyone knows what it is – please get in touch!