Don’t Listen to Your Customers!

Volume 9 Letter 1

“Forgetting our objectives is the most frequent of all acts of stupidity” 1

Many industries are dominated by large incumbents followed by a number of fringe players. In recent years, a number of industries have become more competitive as many well known products have come off-patent. Consequently, the key players have been facing increasing price pressures from new generic entrants and pricing of “off-patent” products has fallen by as much as 50%.

When a new generic enters the market customers will often threaten to move their business to the new generic unless their pricing demands are met. Indeed, often our own field reps will add additional pressure arguing vigorously for management to match the generic’s price to retain important customers. However research shows that cutting price often isn’t the solution. First matching the generic’s price signals your customers that indeed you have been “ripping them off” all these years. Secondly, cutting price is the equivalent of putting zero value on other services that your company may offer.

Before taking the knee jerk reaction of cutting prices take a moment to better understand the value-added by the “Whole Product” – the sales force, technical support staff and other product and service attributes. In one situation a Conjoint study was conducted across the entire customer base revealing that the technical support offered by the incumbent brought huge amounts of value to many of the customers. Armed with this information management refused to budge on price (totally upsetting their sales force at the time). Instead they held price, increased technical support and realized an increase in overall revenue the following year.

The power of conducting individual-level conjoint analysis and other research as opposed to solely relying on sales force “detailed customer knowledge” can defend and protect an existing price point. When launching into a new segment or when being attacked in a segment you currently dominate:

1) Don’t listen to the customer “too much”. While sales force input is important, it is only one of many inputs that can guide pricing decisions.
2) Don’t use focus groups, “willingness-to-pay” (WTP) surveys or simple secondary research to set price
3) Don’t listen to the “vocal customers” only. Do analysis at the individual level and use these results at the individual level.

When under attack :
1) Do your homework – get your segmentation right and fully explore individual customer pricing resistance.
2) Develop the ‘value equation’. List all the customer costs involved in the purchase and deployment of the current product right from delivery costs through to disposal, keeping in mind that these costs may be different for different market segments!
3) Do a Conjoint study to better understand the perceived value of your product for each market segment served.

When threatened by a new product entrant who is competing on price, quick knee jerk price drops are often regretted in the long run. Remember forgetting one’s objectives is the most frequent of all acts of stupidity.

1. Quote from Friedrich Nietzsche

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