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.”
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...]