Myth #4: Can I Really Understand Customer-Specific Willingness to Pay?
For years, sales leaders and pricing professionals have sought to understand exactly what a customer would be willing to pay for the products they sell. If a company understood customer willingness-to-pay before the negotiation, they could develop strategies to realize that price during the negotiation. In the absence of good willingness-to-pay information, salespeople have relied on their experience and selling skills to draw out that information during the sales process. Pricers have used historical data and value-based pricing methodologies to understand how a customer values their products. Companies like LeveragePoint have done a great job putting tools into the hands of many companies that help drive that value-based pricing.
At the Professional Pricing Society conference last year, one of the keynote speakers spoke of targeting pricing to market segments versus their previous one-size-fits-all pricing. He spoke of his company’s great returns as a result of their work. Finally, the speaker envisioned a future where not only customer segments but also each individual customer could be optimized based on their individual willingness-to-pay. In that speaker’s opinion, that was the future of pricing technology.
The future is here.
The principles of customer-specific segmentation – mapping customers based on their likeness in valuing your products – were covered in this blog post. And understanding where pricing is tomorrow, not just today, is as well. Once you’ve implemented the principles of customer-centric segmentation and market-based pricing forecasting, the final step in pricing optimization is to understand how individual customers in each segment value your product versus the market price. Take, for example, a customer, bucketed with its peer group during segmentation, who pays more than its peers by an average of 6%. Armed with that intelligence during the next negotiations, where would you price them? Certainly not at the market average. You’d be giving away value. Why not price them at a 6% premium? It seems pretty clear, doesn’t it? But why doesn’t everyone do it?
It takes a lot of time and effort, and for most large organizations it’s impossible without the technology to understand each customer’s segment, purchasing patterns and anticipated willingness to pay. In fact, understanding a customer’s specific willingness-to-pay versus its peers is a relatively simple exercise. It’s just one for which many companies don’t have the tools to use on a regular basis.
Ask yourself this question: If I had the tools to mine my company’s data, to segment along customer buying patterns, anticipate market-based pricing and then optimize based on a customer’s willingness to pay, how much would it be worth to me? Or more importantly, how much are you losing by not doing it?