The Value of BTL/CVM Pricing

BTL (Below-the-line), or CVM (Customer Value Management), or Segmented Pricing are all buzzwords that almost all business people heard about, but…

What is the real value of CVM/BTL Pricing for the business?

I will demonstrate it through a simplified example, so keep in mind that there are many different ways of applying it and this is just an example of a Business to Consumer model which also has above-the-line/open market offers.

So, let’s consider in this example an online retail store.

In this model the ATL (Above-the-line) price is the one presented to all unidentified customers that are surfing the webpages of the online retail store looking for great deals.

The ATL price tend to be aligned with the Demand and Supply curves intersection (Price vs. Quantity), since it is the market equilibrium point.

 Note – Usually the cost per unit sold tend to decrease with incremental quantity, but for the sake of simplicity of this model example, that cost will be stable.

Although the online business is extracting relevant profit with the ATL proposition, as you can see in the graphic above, the company is not maximizing their overall profit and revenue potential.

How to improve business efficiency and extract more revenue and profit from the market?

The business efficiency can be improved through Customer Value Management (CVM), where it can be developed Segmentation Analysis, Targeted Marketing and also Targeted Pricing, communicating tailored offers to those customers through Below-the-line channels, where only selected customers will be exposed to personalized discounted offers.

The company through CVM efficiency improvement will now have multiple supply curves to address different segments that were not willing to pay the ATL price.

So, BTL discounted offers managed through Targeted Marketing, Targeted Pricing and Targeted Communication will generate incremental revenue and incremental profit, since the customers engaged with the online store will increase, generating more sales.

In this example of the online store, how it can be implemented?

• The first step will be always through data analysis; in this example the online store may explore different data sources. Examples: The customer's accounts details in the store, their previous purchase records, or the website cookies that track the pages that the customer visited without buying the items, and others.
• From the data analysis previously described, the online store may now identify different customer segments and deliver to them personalized product/price proposals with the support of revenue/margin optimization models.
• And finally, the tailored offer must be communicated to the customer through a BTL channel (example: newsletter) so it may be promoted individually as an exclusive promotion only valid for that customer.

Following this approach, the online store can now explore new segments that before were out of reach from the ATL proposition, since although they had interest in the product, they were not willing to pay the ATL price and as shown in the graph below, the company will be able to increase their revenue and profit.

The Risk and Challenge…

… It is critical to avoid impacting customers that were willing to pay the ATL price with the BTL discounted prices.

If the segmentation analysis and/or execution are not properly executed, there is a high risk of cannibalization of the ATL revenue by the BTL discounted propositions, therefore leading to revenue erosion, instead of revenue growth as intended.

Keep in mind that proper Customer Value Management through BTL Segmentation and BTL Pricing require a lot of resources, but also don´t forget that the revenue and profit growth opportunities through BTL are also huge.

Note that Customer Value Management (CVM) is not only about BTL discounted offers and this case is just a basic example of how CVM can bring incremental value to a company.

Do you know how much your customers are willing to pay?

Your business success is directly linked to the ability of offering a price that your customers are willing to pay.

As mentioned and detailed in my previous article "What Impacts Pricing", the 3 key pricing drivers are:

• Willingness to pay
• Competition
• Cost Structure

We are now zooming on how to measure the willingness to pay of your targeted audience.

There are many different methodologies to address that research question, but I will be focusing on my preferred technique: Van Westendorp's Price Sensitivity Meter

Why I recommended it?

1. It is easy to execute.
2. The results are clear on interpretation.
3. It follows a quantitative approach; therefore if you apply a representative sample of your targeted segments in your results, you may extrapolate the results for all your targeted segments.

Also, you need to keep in mind that this research method applies open-ended questions combining the valuation at the same time of price and quality.

How to implement this research technique?

1st Step – Identify the target segments of your product/service.

2nd Step – Calculate how many potential customers are in these targeted segments.

3rd Step – From your customers universe, evaluate how many customers you need to contact in your representative sample to be able to get meaningful findings. Therefore it is recommend to contact a sample that conveys a confidence interval of 95% with a margin of error of less than 5%.

4th Step – Conduct the survey (can be in-person, by telephone, or online) with 4 open ended questions (the wording of the questions can be adjusted)

• At what price would you think that the product is too expensive to consider? ("Too Expensive" results)
• At what price would you think that the product is so inexpensive that you would question the quality and not consider it? ("Too Cheap" results)
• At what price would you think the product is becoming expensive, but you still might consider it? ("Not a Bargain" results)
• At what price would you think the product is a bargain, therefore a great buy for the money? ("Bargain" results)

From these questions you may cross the data that you collected with a cumulative perspective (Count of Customers % vs. Price Points) and create a graph similar as this:

The distance between the 2 mentioned below intersection points will give you the range of "Accepted Prices" for your product/service, from a willingness to pay perspective.

• "Not a Bargain" & "Too Cheap" lines
• "Bargain" & "Too Expensive" lines

Some researchers claim that the optimal price is on the intersection of the "Too Cheap" & "Too Expensive" lines, but I challenge that view because as already mentioned the "willingness to pay" isn't the only key driver on pricing to assess the optimal price.

You may argue that Brand strategy and Brand reputation should also be included in these pricing research assessments... and you are right!

Brand value contribution is already incorporated in this research indirectly, as long as your survey questions also mention your brand, if so, customers will incorporate your perceived brand quality and reputation when assessing the product/service price and quality value.

Conclusions:

1. This Pricing research technique will enable you to understand the acceptable price ranges for your product/service from the customer willingness to pay perspective.
2. You will only find the optimal price point (within the ranges) for your product/service after also incorporating in your assessment the other mentioned pricing drivers (Cost Structure and Competition).

As mentioned on the " What Impacts Pricing" article, the willingness to pay is really important, but it is just one of the 3 key pricing drivers.

Therefore the final price setting decision cannot rely only on the Van Westendorp's model analysis. It must also consider the profitability assessment based on your cost structure and the expected competition reactions to your pricing move.