How Do You Determine Your Customer’s Willingness to Pay?

I recently read a great article on Harvard Business Review entitled “The Benefits of Bargaining with Your Customers.” It centered on willingness to pay (WTP) and why it’s so critical. The author, associate professor of strategy at INSEAD Andrew Shipilov, rightly asserts, “The more accurate your estimate, the more likely you are to sell or the less money you’ll leave on the table for the customer.”

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Shipilov goes on to give a personal anecdote from his experience shopping for leather coats in a Middle Eastern mall. In short, the vendor used his negotiation strategy and his designated anchor price point to coax Shipilov’s true WTP on the coat. Read the story, you might, as I did, find some eerie similarities to industrial B2B negotiations.

The story was certainly familiar, as was the author’s tie to business. He noted that when teaching advanced strategy topics, executives often ask him how sellers can accurately assess a buyer’s WTP. He called out that in B2B negotiations it’s common to begin with a high starting price as a method of determining WTP.

Limits of B2B Complexity

While I agree that the seller in Shipilov’s story was masterful, I would counter that the complexity in industrial B2B companies prohibits sales reps’ ability to nurture lengthy negotiation cycles. Typically, B2B companies have hundreds of sales reps, tens of thousands of customers and hundreds of thousands of products; that means in one company there are at least one billion potential price points!

Approaching each and every deal with an inflated price point could be a huge time sink due to the inevitable wrestling over price, but not only that, it could result in walked deals. We typically observe that 50 percent of B2B transactions are underpriced, leaving money on the table, while 20 percent are overpriced, which result in lost share. If companies can better understand a customer’s WTP without engaging in deal-time cross-examination and bring prices to market that align with that, it’s a win-win for everyone involved.

Calculating WTP in B2B

So, how do most B2B companies go about measuring WTP? I was recently chatting on this exact topic. Some of my peers were looking into conducting customer surveys [Read more...]

By The Numbers | The Most Popular Zilliant Blog Posts This Year

Community is integral to staying innovative and competitive in any industry. The Zilliant Blog aims to provide information and strategies that help companies think differently about optimizing their business decisions to help them make their numbers. Educational and insightful, each post presents a new challenge to the status quo. From infographics to price elasticity, the list below ranks the top five posts of the year thus far, listed by the numbers.

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No. 5: Overcome Profit Leakage: Manufacturers Should Adopt “Pay-for-Performance” Approach with Distributors

In this post from January 2014, Barrett Thompson tackles how manufacturers can overcome the challenge of distributors “gaming” the system to secure lower prices. Here, he advises shifting the burden of performance and planning ahead for rebate programs. “A cautionary tale: A big distributor once held claims for 18 months, then filed a single enormous rebate that caught the manufacturer totally off guard and gave them a huge phantom loss for the month in which they paid out that rebate. Take the necessary steps to avoid that situation.” Read more …

No. 4: The Most Important Decision: Deciding How to Make Decisions

This post from Zilliant CEO Greg Peters calls out a major (yet deceivingly minor) challenge in overcoming B2B complexity: “Even the most well-intentioned employees cannot accurately and consistently make the best decision that aligns with company strategy each and every time. They are only human. While that may sound like a cop-out, humans are, in fact, persistently inconsistent in their decision-making and predictions.” Read his thoughts on how when each small decision is made optimally, the entire company benefits.

No. 3: Price Elasticity in B2B … Who’s Right?

This post from contributor and MindBrew Editor Rafe VanDenBerg delves into a persistent debate in B2B pricing. There are opposing views [Read more...]

World Cup Callback: Did the Predictive Model Fail Me?

I got an interesting call last week from JP Arendt, director of pricing effectiveness at Autopart International. It goes without saying that I love it when customers call to chat, but don’t I love it even more when they call me up … to call me out! JP wanted to discuss the flub I made in predicting Brazil to win the World Cup.

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I have to admit that hindsight vision is 20/20, and yes, I got it wrong. So did Nate Silver and his FiveThirtyEight model, as well as the Goldman Sachs model. In fact, the top three most-popular models only got team positions right, none of the models correctly predicted the winner. The closest was the Bloomberg model, which correctly predicted 68 percent of the ending team positions. Check out this cool infographic for more fun facts.

So when JP called and asked what went wrong, it was a great opportunity to discuss where I thought my approach to selecting a winner was flawed. More importantly, to discuss how to apply these lessons in a business environment to properly leverage predictive models to optimize the overall business.

As we discussed, models are advanced algorithms that take data and make predictions, and the model is therefore only as effective as the data available to it. This is perhaps the inherent flaw in trying to use models alone to predict sports tournament outcomes, which are at the mercy of chance. Weather, injured players, team morale and strokes of luck can turn a landslide into an upset. In this case, the model didn’t necessarily fail, but as chance played out, Brazil would have to play without its captain and central defender, Thiago Silva, who was suspended after the final match against Colombia. Another hit to the team came when Brazil’s best player, Neymar, fractured a vertebra in his back during the quarterfinal and was ruled out for the rest of the competition. [Read more...]