Inflation rates around 10% were considered “extinct” in our regions, and I recall that about two years ago, there were a series of articles by highly esteemed professors explaining why high inflation could no longer occur. A major misconception.

In reality, prices in certain product categories are increasing by 20 – 30% annually, potentially leading to a doubling of prices within two to three years. This has dramatic implications for marketing. In marketing, it’s not about determining the price based on cost considerations; it’s about how the price is perceived by the customer: Does the price align with my positioning? Is it perceived as fair? Is the price still recognizable at all?

In fact, consumers are facing a significant challenge now. Unconsciously, individuals store a multitude of prices for everyday products in supermarkets, services like haircuts or internet plans, as well as benchmarks for car purchases, televisions, or package holidays. This wealth of price knowledge is, from the consumer’s perspective, painfully devalued, undergoing a process of relearning and being unconsciously repositioned within mental frameworks. Prices that were once considered luxury now fall into the middle class. Entry-level prices have shifted upwards, and these changes are sometimes dramatic, while in other cases, they are not evident at all.

Before introducing two tools that you need right now to assess your pricing competitiveness, let’s briefly discuss your scope for action:

Variant 1: Do Not Change Prices

This sounds fair and enticing if you can afford it due to a high margin or minimal cost pressure, or if volume increases compensate for the lower contribution margin. However, its feasibility cannot be determined without additional data. Lower prices are often associated with lower quality, and if the price changes in the opposite direction for the product group, you may alter your positioning, potentially shifting from a premium to an undesired middle positioning.

Variant 2: Keep Prices the Same – Reduce Quantity
This strategy also assumes that customers do not want change. It shares the same disadvantages as Variant 1, with the additional risk that reduced quantity may lead to a loss of trust. This strategy is known as “Shrinkflation”, and being a pioneer in this trend is generally not advisable.

Variant 3: Increase Prices – But by How Much?
In reality, this is the question for 90% of companies. There are often limited opportunities and constraints, both contractually and practically, to change prices. The adjustment must be such that the contribution margin does not decline in the medium term. This can only succeed if customers accept the new price without delaying purchases or switching to competitors.

Every strategy is doomed to fail if you don’t know two things:

• What price will be accepted?
• For which features are customers willing to pay more?

For this, there are two excellent tools:

Which price will be accepted?

For pricing market research, it is generally acknowledged that naive queries like “What is the maximum acceptable price?” or “Would you buy the product at this price?” are a waste of resources, as they often yield meaningless and inaccurate responses. Surprisingly, many institutes still recommend these approaches in practice, often selling them under the guise of a method. In reality, meaningful insights into price behaviour are obtained through implicit methods, where the respondent does not recognize the objective of the questioning.

The classical implicit method is the Implicit Association Test (IAT), which has recently been highly successful in pricing and has shown excellent results for many products. The method is quickly explained:

Reaction time measurement is a proven tool for capturing automatic, unreflective attitudes and associations of consumers. This computer-based method dictates specific association tasks, through which a range of attributes, such as expensive or affordable, are assigned to a product. Participants assess the price of a product within a very short time frame, ensuring a quick, unreflective, spontaneous response. This method helps avoid response distortions due to social desirability or a tendency to choose the middle option.

In practice, the use of reaction time measurement in product pricing adds value, as it enables the determination of the ideal product price on an implicit level without cognitive distortion.  With the IAT, you can quickly and at relatively low costs test whether your product is considered price-worthy compared to the competition.

For which features are customers willing to pay more?

The price always represents a sum for a bundle of product features, which customers often do not perceive separately. The brand alone embodies a bundle of trust and quality promises, alongside considerations like packaging sizes, delivery times, etc.

To determine the actual importance of individual product features from the customer’s perspective and, more importantly, their contribution to customer willingness to purchase, you can employ Choice-Based Conjoint Analysis. Traditional market research tools quickly reach their limits when it comes to identifying which features customers are willing to pay more for. Direct questions about the importance of product features using rating scales, rankings, etc., often yield limited answers. Responses frequently indicate that everything is important. Direct questions about price willingness are also prone to failure as they fail to provide valid data. Modern, innovative, and preferably implicit methods are needed to achieve reliable results, and that’s precisely where Choice-Based Conjoint Analysis comes into play. It simulates real purchase decisions by repeatedly asking respondents to choose between various product bundles, encompassing the examined product features, especially brand and price.

The results, the relevance of individual features, their impact on price willingness, and ultimately the optimal price, are not derived from direct inquiries. Instead, they are calculated based on product selection decisions. Additionally, the tool allows market simulations, providing insights into the percentage of buyers choosing your product, how much your market share changes when altering your product and/or price, and the contribution of individual product features to price willingness. It also reveals the potential upward price flexibility compared to competitors. Ultimately, Choice-Based Conjoint Analysis represents the state-of-the-art method for measuring buyer preferences and optimizing prices. It offers insights into customer behaviour with a level of validity and depth unmatched by any other market research tool.

Author: Dr. Frederik Lehner

Even if you’ve already discovered a higher beer price at your regulars: Most businesses are planning to raise prices in the next few months, but haven’t done so yet. So here we provide some thoughts on how to do it well. Ahead, also read the next post to get it quantitatively right.

Do I need to increase prices at all?

This question is quite justified. The almost 10% inflation still says little about how much more expensive your company has to buy to date. Electricity and gas may be a very small part of your business, or your margins may be so large that you can simply swallow the higher prices. If so, it’s worth considering keeping prices stable and retaining existing customers and attracting new ones in an environment of sharply rising prices. However, on the one hand, this scenario will only apply to very few companies, and on the other hand, all companies will have to reckon with massive wage increases in the near future. It is therefore advisable in any case to deal with the topic and the technology of a sensible price increase.

When is the right time?

A price increase is rarely received euphorically, yet it is a bad idea to postpone it for too long! The customer does not appreciate it if you have not made a price increase for three years, but now a much larger one at once. This gratitude will not be forthcoming. And in general, now is a very good time to increase prices, because the arguments for doing so are really obvious to everyone at the moment.

Shock prayers to heaven or deeply relaxed

Warren Buffet cites “pricing power” as the most important criterion for a company’s value. If a company can easily push through a price increase in the market, then this pricing power is given, but if one sends prayers to heaven so that the customer does not leave, there is obviously a lack of pricing power. You can (see next article) pre-test the ability to raise prices, and in most cases that makes a lot of sense, because a customer that’s gone is gone. However, if your customers immediately go away when a price increase is appropriate, there is a fundamental problem with your business case and it won’t be saved by reducing your margin.

Rethink pricing models

If a price increase is unavoidable, you could use the opportunity to rethink your pricing model in general. There are many possibilities, from “flat prices” to “everything as a service”. It would go beyond the scope of this article to describe all the possibilities, but I would like to give you some food for thought:

Often, certain prices – also due to years of very low inflation – have already burned themselves into customers’ brains in such a way that an abrupt increase of, say, 10% can actually be risky. The simplest solution would be to keep core prices and signal prices constant and to charge extra for certain additional services that may have been added over time.

In this way, you can often actually increase average prices very well without changing the base price by only pricing additional services according to the acceptance of the target group. A very price-sensitive buyer will actually get a product cheaper without additional services, while a safety-oriented customer will pay a premium for longer warranty periods, for example. Intelligently done, average price and sales increase with high acceptance of the respective target group.

Segment target groups

Inflation in general, and therefore also price increases in your company, have very different effects depending on the target group. When consumers notice that the price increase is nibbling away at affordability, a lot happens in the lower and upper price segments: many purchases move to the entry-level price segment to give themselves breathing room for important purchases. In the upper price segment, the reward takes place, which is also there to reassure oneself that one still belongs to that stratum that can afford something now and then. How this looks specifically with your customers and/or products is something that should be empirically tested in advance.

It should be clear that a linear price increase is rarely the ideal solution!!

Rethinking pricing

Unfortunately, I have not been able to provide a simple recipe for the price increase that may be necessary. There is none. Rather, my idea was to open your eyes to the fact that pricing is an extremely complex tool that can have a very strong impact on the bottom line. Investing in pricing excellence now should help you to get through the next years well and at least defend your margin.

If you have further questions about pricing, contact the author

If you want to increase prices and ask yourself how high a price increase can be without losing customers, or which feature you could perhaps do without for cost reasons in order to keep prices stable, you will soon realize that this is an extremely risky bet without empirical data. In the following, we present a tool that predicts the behaviour of your customers when prices change or when the offer changes. Along the way, you’ll also get information about your brand value.

Price is the most important profit factor for a company. If it is possible to increase prices by a few percent without losing sales, many companies can double their profits. However, this is only possible if the killer application is known, i.e. those product features for which the customer is willing to pay more money. More and more often, these killer applications are not in a technical achievement, but in a special feature of the service (fast delivery, warranty periods) or in an emphasis of an existing feature: Although all windows are “custom-made”, this feature is not communicated by the window industry. However, customers are willing to pay more for custom-made windows. The situation is similar when safety, convenience or sustainability are highlighted, provided of course that this corresponds to the facts

A market simulation also clearly shows whether there are price thresholds, i.e. a price which, if exceeded, leads to a massive drop in sales. However, price increases up to just below the price threshold cost almost no sales. If you know the price thresholds, you can either increase prices without losing sales (a previously wasted profit) or you know the maximum price for a large target group.

In addition to price and product features, the brand plays a central role in the purchase decision. In this context, the market simulation answers a whole series of central questions on the topic of brand: First, it can be determined what share of the overall decision the brand plays at all. There are markets where 60 – 70% of the decision is based on the brand (and thus not on price or product features) and there are markets where brands play virtually no role. Much more important, however, is the question of what value one’s own brand has in comparison to the competition. The market simulation can express in Euros per product whether there is a positive, neutral or even negative brand value. In our experience, there are often astonishing surprises in this area in particular.

The basis of the market simulation is in no case a questioning of consumers about their wishes à la: “What is the maximum you would pay for this brand? This would only result in meaningless wishful answers. Valid market simulations are based on a realistic simulation of purchase decisions by means of a software-based Choice-Based-Conjoint-Analysis, which simulates consumer decisions and very realistically simulates the change of decisions and brand shares. For more details, please refer to “The road to market simulation”

The road to market simulation

The CBC (Choice-Based-Conjoint) in practise

What actually happens if you increase prices by 5%? And what would be the effect of shortening the delivery time to 7 days or extending the warranty to 2 years? What would have been unanswerable years ago can now be done at the push of a button. The market simulation not only shows how market shares are reshaped by price or product changes, it even shows which competitors you lose and from whom you gain market shares. We will show you how this works here:

When customers (whether B2B or B2C) make a purchase decision, this is co-determined by a bundle of characteristics: If you’re an Apple fan, you’ll buy this brand and see if the price still fits into your budget. Someone who is not interested in brands will, for example, look at the price of a computer monitor in relation to the most important product features.

In each case, a choice is usually made from different offers or a purchase is not made. This is exactly what market simulation models based on choice-based conjoint are based on.

In a first step, those features must be defined with the client who significantly influences a purchase decision. Of these, price and brand are almost always predefined. Since a maximum of 6 – 8 features must be queried, it can make sense, especially with technical products, to have a focus group beforehand so that one does not forget an essential purchase criterion, which is often not technical at all, such as “fast delivery” or “user-defined colour”.

Once the decisive product features and their various characteristics (e.g., screen diagonal) have been defined, the field phase can begin: Product feature – screen diagonal; characteristics: 42 inches, 49, inches, 55 inches, etc. the competitors to be included in the analysis defined, the field phase can begin. Using an online survey, the purchase decision process is recreated as realistically as possible by requiring respondents to make several product comparisons. In practice, several different product bundles are suggested to the respondents, which differ from each other in terms of brand, price, and other defined product features. The respondent thus has to weigh the different product features relative to each other and ultimately decide which option to select.

If all the product comparisons have been carried out successfully, it is then possible to calculate how important the brand, the price and all the other product features taken into account are for the purchase decision process.  The software behind the survey enables the statistical calculation of so-called part worth values for the individual product features. In this way, it can ultimately be validly determined which features are particularly important for the product evaluation or decision, as well as the degree to which each feature is preferred from the customer’s point of view.

However, this superior methodology not only makes it possible to analyse the relevance of individual product features in the decision-making process, but also to simulate the impact of product and price variations on the achievable market share. Based on the part worth values determined, the “share of choice” in the sample can be calculated – in other words, what percentage of respondents would opt for a particular product-price variation. All the results of the CBC analysis can thus be combined in a simulation tool that shows, on the one hand, which market conditions – in terms of the “Share of Choice” – prevail in the market for certain offers and, on the other hand, how these market conditions change with price or product variations. In other words, the software allows you to simulate the extent to which you can increase your market share by lowering your prices or improving your product, and from which of your competitors you steal market share in the process.

If you have further interest in a CBC, please feel free to contact us here

Turnover in the office furniture market in Western Europe will rise by 10.7% this year and thus continue the high-flying trend it started last year (2021: +13.2%). Besides inflation, turnover is driven by the growth of smart office solutions that support new work concepts, as a study by Interconnection Consulting shows.

Many producers were forced to increase their prices in 2021 or at the latest at the beginning of 2022, due to higher prices for raw materials and energy. “This year, we are also seeing a high increase in inflation, coupled with supply chain issues and limited access to raw materials and supplies. Therefore, we expect further price increases this year,” foresees Katarina Gajdova, the author of the study. This means that the office furniture market in Western Europe will also grow to a record level of 8.1 billion euros this year. The strongest growth in 2021 was recorded in the UK, Denmark and France, with increases of 26.5%, 18.3% and 16% respectively. Besides inflation, the strong increase in the previous year was driven by deferred projects during the Covid pandemic. While the industry’s revenue growth is impressive, sales in the regions studied are rising only moderately (2022: +3.8%).

Green Trend Despite Higher Costs

The home office is here to stay, the office furniture manufacturers surveyed in this study are also convinced of this. On the other hand, there is growth in smart office solutions, which should support the overall growth of the market. The redesign of office environments should also contribute to growth, as the study shows. This redesign of the office space should counteract the desire for home offices and thus also bring employees back to the office location. Positive developments are seen especially in the segments of sitting and standing desks of lounge sofas and collaborative work environments. The study also shows that consumers in Western Europe are less price-sensitive than other regions of the world. This leads to a greater focus on eco-friendly materials and sustainability in demand. Overall, swivel chairs are the largest product segment in the market with a 26% share. SMEs make up the largest customer segment with a share of 61%. The home office segment already has a share of about 10%. The public sector accounts for about 15%. The most important companies include: Ahrend, Assmann, Flokk, Haworth, Kinnarps, König & Neurath, Sedus, Senator International, Steelcase, Vitra, 

The study examined the markets: Austria, Belgium & Luxembourg, Denmark, Finland, France, Germany, UK, Italy, Netherlands, Norway, Spain, Sweden, Switzerland