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Friday, October 7, 2016

You Get What You Pay For, Part Two of the Understanding Decisions Series: Exploring Price as a Reason for Choice

“Price is what you pay. Value is what you get.” Said by famed investor Warren Buffet, this quote draws distinctions between different components of cost. But how does this expression from one of the world’s wealthiest men play out when considering buying decisions made at the conclusion of a traditional B2B sales process?

Anova’s research reinforces Buffet’s assertion. Ultimately, price dominates decisions in Mature markets twice as frequently as decisions in Growth markets. In our research over the past year, cost was mentioned as a reason for choosing a provider 59% of the time in Mature markets, and 29% for clients in Growth markets in our Win Loss Research.

What is behind this 30 point difference?  In Mature markets, competitors are selling a similar product or service. The relatively indistinguishable product means buyers do not have to worry about a difference in utility – in other words, one product or service would “work” as well as the competitor’s product or service. Buyers put a greater emphasis on minimizing fees or cost in order to gain the most value. How does a firm win in these situations? Fee compression takes hold and vendors offer lower prices.

In order to illuminate this, think of an example from the group insurance space. ABC Corporation wants to offer the best possible benefits plan at an affordable cost to their employees, and goes out to market to compare bids from a few insurance providers. When the proposals come back all of the plan features are roughly the same. Insurance Company X, however, has discounted their plan 20% less than Insurance Company Y. Company X knows that since their benefit offering will be similar to their competitors, they need to squeeze their margins in order to differentiate themselves. ABC Corporation sees the two plans as substitutable, and in this situation, Company X’s ability to use lower costs as a competitive advantage wins them the plan.

Conversely, research in Growth markets shows something much different. In Growth markets, there is often a greater difference in the utility derived from two competing products. Think of this example: ABC Corporation is now looking into business intelligence software to streamline its manufacturing processes. Software Company X offers a low-cost product, but with minimal functionality and management portals that are difficult to navigate. Company Y, on the other hand, allows users to view the throughput times of their manufacturing process at a number of different facilities across the country and monitor the productivity of different teams, all on an easy to use dashboard. Even if Y’s software is more expensive, the value gained outweighs the costs, and (unless ABC Corporation is budget-strapped) will most likely be chosen. In this decision, however, functionality and ease of use will be cited as reasons for choosing Y, not price.

While price is the most frequently cited reason for choice in both Mature and Growth markets, it is not the sole decision criteria in competitive situations. Other factors need to be explored. In our next blog post as part of this Reason for Choice Series, we will further investigate the level of impact a previous relationship with a vendor has on a buying decision.

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