Beyond Willingness to Pay: Incorporating Contextual Factors in B2B Pricing Research

“At its core, [willingness to pay] is a classic problem. In fact, it’s among the oldest and most important problems we face as marketers,” says Derek Rucker, professor of marketing at the Kellogg School of Management.

He’s right. As a product marketer, you need to ensure your pricing does not leave money on the table, be out of reach for an important buyer segment, or lead to a significant competitive disadvantage. Many pricing research techniques can help identify the optimal price point for your solution. Conjoint, Gabor Granger, and Van Westendorp to name a few.

Rucker and his colleagues developed another technique for consumer products to add to the mix. It is called the Comparative Method of Valuation (CMV). The model includes context and alternatives in the willingness-to-pay (WTP) questions. As Eric Anderson, Chair in Retailing, Professor of Marketing; Director Kellogg-McCormick, describes in a recent article in Kellogg Insight, “You might pay upwards of $10 for your favorite beer at a fancy hotel bar, but only $5 for the same beer from a beachside vendor. That difference in WTP may be completely rational and driven by what alternatives are available.”

Isurus could not agree more on the importance of including context in pricing research, especially for complex or multifaceted B2B solutions. For decades, we have guided clients to include contextual questions in their surveys and discussion guides and to factor context into the interpretation of the results. Often, contextual data provides more useful insights than asking B2B buyers what they would be willing to spend.  We use these four categories of contextual data in pricing research:

• Current solution
• Priorities and realities
• Research
• Historical

Current Solution Context

Businesses do not make the same discretionary purchases as in consumer markets. They buy solutions to address known pain points and to address a job to be done. They seek an outcome, not a product solution. Therefore, the first two contextual reference points we recommend exploring for WTP are: What solutions do they use today, and how much do they spend on those solutions? Are they using an indirect solution such as a spreadsheet or a module of another system? Are they investing in a comparable solution? A competitor? The current solutions a company uses and the level of investment in those solutions provide a good indication of the relative importance of the job to be done and their WTP for solutions.

In general, businesses will pay more for a better solution than what they have in place today. But it is incremental. They typically will not buy solutions that are multiples (2X, 3X, etc.) over what they pay for their current solution, even if buyers acknowledge that the new solution is superior to what they have in place.

Priorities & Realities Context

Businesses do not buy and implement solutions in a vacuum. A new solution that costs more than their current approach competes for budget, not only with other priorities in the department but also with the solutions other departments want to invest in. Sometimes, adopting a new solution requires considerable change management within the organization. When comparing a more robust solution or platform to what they have in place, B2B buyers sometimes recognize that they do not have the staff or expertise to fully utilize the more robust solution. Understanding these dynamics helps identify the delta between the value a B2B buyer sees in a solution and their realistic WTP based on their practical realities.

Research Context

Asking a version of the question, “What would you be willing to pay,” is at the core of most pricing research techniques, including the new CMV. Given that all techniques ask for buyers to provide an answer, it is important to consider the precision of their answer. As the cost and complexity of products increase, the accuracy of an individual’s recollection of what they pay today decreases. As does their consideration of the full context of the solution. Using the early example of beer, your estimate of what your favorite beer costs is likely accurate. Your recall of what you pay yearly for auto insurance will generally be on track but could be off by 5-10%. Your on-the-spot estimate of what your company pays for its marketing automation software will be right in terms of scope of magnitude but is unlikely to be highly precise. You may be close on the base subscription fees, but forget about add-ons or service levels.

Even if you don’t ask about what they currently spend directly, buyers will consciously or unconsciously use these internal estimates as context for answering the WTP questions about a new platform. It would be fairly easy for a consumer to determine if they’d be willing to pay $1 more for a consumer-packaged-good at the supermarket, even if they did not need one today. It is much harder for a B2B buyer to decide if they’d be willing to spend $25,000 annually on a new solution, especially if they are not in the market for one today. When they provide an answer, they generally think about what they spend today and assume the solution’s devil-in-the-details is better than what they have today. Therefore, their answer is an accurate scope-of-magnitude estimate of their WTP.

However, pricing research techniques and models provide data that is deceptively specific. The larger the solution being explored, the more artificially precise the estimates become (e.g., $23,692 annually). As the user of the insights, it is important to apply judgment and context to the data to determine what price point makes sense once all things are considered.  The adage “It is better to be roughly right than precisely wrong” certainly applies in B2B pricing research.

Historical Context

Another way to think about context is historical behavior. History is not an exact predictor of the future, but it provides a reasonable predictor of how things will unfold. Exploring and considering context in WTP studies will help narrow the delta between what people and companies say they will do and what they will actually do.

Pricing strategy is a multifaceted challenge that requires careful consideration. When you engage in your next pricing study, include contextual analysis regardless of the approach or technique you use. To learn more about how Isurus approaches pricing research, you can contact us here.