The Last in a Series of Four Voice of the Customer Case Studies
By Anthony Bahr, Vice President, VOC Strategic Practice, Strategex|
The underlying motive for virtually all mergers and acquisitions is the pursuit of value creation. As documented in our previous article, roughly 60% of post-close value creation can be attributed to revenue growth, while operational efficiencies account for only 20% of post-close value creation.
Since growing revenue is usually a cost center, many companies opt to prioritize margin improvement over topline growth – the true driver of value creation. However, there is another way to boost revenue without the margin compression that comes with organic topline growth.
Raising prices is a relatively quick and easy way to realize topline growth, but it comes with inherent risks: Will customers accept a price increase? Will price increases lead customers to lower their share of wallet? Will a price increase damage the company’s position in the marketplace?
All of these questions can be addressed through a well-designed Voice of the Customer (VOC) engagement, and in this last of our four-part series, we’ll demonstrate how one of our clients used the VOC process to determine whether or not the time was right for a price increase.
Our client, a manufacturer of ready-to-eat cereals, had recently been acquired. The buyer’s primary motive for the purchase was to obtain intellectual property rights, including patented processes for manufacturing cereal bars and other on-the-go formats. Therefore, the post-close strategy focused heavily on the development of new, on-the-go products that would be issued under the banner of the parent company.
Meanwhile, the acquired company continued to operate with a high degree of autonomy, though the board did issue a three-year challenge to raise EBITA by 20%. While not an unobtainable goal, management struggled to develop a strategy that would meet this mandate given the overall market for ready-to-eat cereal had been gradually eroding over the past decade.
With limited time and capital, management decided that a price increase should be the cornerstone of their value creation strategy. However, management also recognized the inherent risk in raising prices, especially since their brand was not considered to be a category leader.
Prior to conducting any research, we first worked with the company to develop a three-part litmus test to determine if price increases should be considered. This test included the following questions:
- Does the company have a high Net Promoter Score?
NPS is the industry standard for determining the strength of customer relationships. An index ranging from -100 to +100, NPS measures the willingness of customers to recommend a company to others, and is used as a proxy for gauging customer satisfaction and loyalty.
Generally, a company with a strong NPS is better positioned to raise prices, and the company with the highest NPS within a category is often the firm that commands the most premium price. The higher price can be justified because loyal customers see value in the relationship beyond the product or service itself.
- How do prices compare to those of competitors?
Quantifying customer perceptions toward price (or any metric for that matter) is certainly useful, but it’s easy – and dangerous – to fall into the trap of generating and interpreting data without any competitive perspective. This is why capturing perceptions toward pricing should always involve a two-step process.
First, we measure pricing perceptions on an absolute basis. This approach almost always suggests that prices are already considered to be high, as customers rationally want to maximize the value they receive via lower prices.
The second, more insightful approach, is to measure pricing perceptions relative to close-in competitors. By having customers rate our prices relative to competitor prices, we develop a greater degree of confidence that there is or is not room for an increase.
If customers suggest prices are at par with or lower than other suppliers, there may be potential for an increase so long as a distinct and compelling value proposition exists.
- Are there leverageable influencers in the customer decision journey?
There are dozens of factors that decision makers have to consider when selecting a company. While price is always a consideration, in non-commodity sectors it is rarely the primary influencer.
When deliberating a price increase, it’s critical to know how customers rank the importance of price relative to the broader hierarchy of buying criteria. If price is a secondary or tertiary factor, there is a potential to increase prices so long as the company is delivering strong performance on superseding factors (nutritional value, household preferences, etc.)
To generate the findings needed to answer these questions, we conducted a self-administered online survey of 1,000 customers. These customers were randomly selected from a panel of primary grocery shoppers, which was representative of the adult population across a variety of demographics.
While the online survey would generate content, we also conducted three focus groups to provide further context through qualitative insights.
- The company had a strong NPS, especially for a consumer packaged goods brand. While the company was not the category leader, there was a large segment of customers that considered the brand to be their go-to for ready-to-eat cereal. Among those who were not promoters of the brand, price was never mentioned as a barrier to loyalty.
- The company had prices that were perceived to be, on average, 12 points lower than those of close-in competitors.
- Customers said that price was the third most influential criteria, with kid requests and nutritional value being more likely to sway decisions at the shelf. Furthermore, when ranked against competitors, our client held a significant advantage on these top two criteria.
Based on these finding, management decided to move forward with select and modest price increases in a handful of test markets. After the six-month pilot was complete, it was verified that raising prices nationwide was a low-risk move that would help the company make considerable progress toward its goal of improving EBITA by 20%.
Boosting topline revenue via price increases is one of the easiest ways to kickstart value creation, but it can be a risky decision to make. If the answers to these three questions are favorable, especially among top accounts, we tend to find that a price increase rarely results in negative customer blowback.
Anthony Bahr (firstname.lastname@example.org) is a Vice President in Strategex’s Voice of the Customer Strategic Practice. Through the VOC process, he provides deep insights into a customer’s level of satisfaction and loyalty, as well as competitive positioning, innovation pathways, pricing optimization, etc. Ultimately, his work enables clients to transform research findings into actionable growth strategies. Anthony holds a BBA from Loyola University Chicago and graduate degrees from the University of Oklahoma and University of Chicago.