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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

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