I don’t mean what makes something self-adhesive… that’s glue. I am talking about a product that customers seem to carry on buying with little chance of the competition getting a look in.

Investors will often salivate over a business that appears to be operating in a sticky market. There is a fairly simple definition of this type market in rational economic terms:

The cost or risk of changing supplier is greater than the likely saving in price or increase in value to be gained by doing so.

There are common conditions which often indicate a market is sticky:

Relatively Low-priced Items
This means that any saving from switching is likely to be small. A 20% saving on next to nothing is next to nothing.

Perceived as Critical
Anything where failure has a cost to the organisation or disruption to everyday life i.e. a new untried supplier might bring things to an ugly or chaotic halt.

Repeating Purchase or Subscription
The purchase decision was already made some time ago. The rationale may be lost in the mists of time but people assume it was logical, hence you automatically purchase from the current supplier.

Effort Required to Disengage or Switch Supplier
Difficult to cancel subscription, complicated to research and evaluate a substitute supplier. Reconfiguration, reorganisation or re-training needed to use an alternative.

These are the logical and rational reasons that make a product sticky. There are loads of other emotional and instinctive drivers of sticky markets some of these are perfectly logical when dig a bit into the human psyche. Popular sayings often give clues to these. For instance: “Better the devil you know…” “There’s no such thing as a free lunch” “They are not perfect, but they do the job”. If any of these show up in market research or commercial due diligence, they are good indicators.

Often, but not always, businesses like this have pricing power – headroom to increase prices without losing too many customers. The reason for this is simple if you think about it:

It is not the supplier, but the category of product that is sticky. Therefore, it takes a lot to win business in the first place. The incumbent may have had to offer an eye-watering discount. So, when the customer was first won, the supplier had under-priced the product. Unless there has been a strategy to increase the price significantly over time, they are likely to be still under-priced now.

Herein lies the catch that many investors don’t spot. It is by definition difficult to grow in a sticky market. Salespeople will struggle to get appointments, products will find it difficult to get listings or shelf space and worst of all, the heavy discounts required to shift the incumbent make the price look too good to be true.

So, a word to private equity… If it looks like a sticky market, check it ticks the boxes above. If it is a sticky market, don’t expect any organic growth… even if the product has competitive advantages. The exception to this is where the product category is new and the market not fully penetrated or the supplier’s offering is unique and ideally has some IP associated with it.

The good news is though, unless the management have been actively on the case, there is usually a fantastic pricing opportunity with all the pleasing results this brings to EBITDA and enterprise value.

We often get asked if we can research the price customers will be prepared to pay for a product or service. What clients expect is someone with a clipboard asking questions. We tend to upset clients who insist on this approach by telling them that is not what we do.

Whilst we do employ market research techniques in our work it is almost never in the way people think.

Over the years market researchers have been struggling to find a methodology that will provide insight on pricing. The problem is that when confronted with a question about the appropriate price for a product, a respondent is sorely tempted not to give an honest opinion for obvious reasons. Research companies have devised all sorts of question structures to try to avoid this outcome… conjoint analysis, value maps, sequential monadic, relative positioning…. the list is almost endless.

Sadly they all have fundamental flaw. Real decisions about price are not usually made talking to a nice smiley person with a clipboard, they are made with a screaming toddler trying to climb out of the trolley, under pressure from a slick salesman trying to close a deal or scanning pages of online catalogues trying to work out which site is most likely to ship you the goods on time and in one piece.

… in other words context and presentation are everything. All too often companies see price the way it appears in profit calculations; as a variable in isolation, when in fact its one of a blizzard of variables presented to the customer at the point of purchase that will include varying numbers of competitors, alternatives products, the marketing department’s lovely USPs and all the subtleties of branding and packaging….and of course the option of spending their money on something else altogether.

The other problem with asking about price in the sanctified surroundings of a market research interview is that respondents tend to engage what Nobel prize-wining psychologist Daniel Kahneman would call ‘System 2′. This is the part of the brain that thinks logically rather than instinctively. Decisions around price, even in B2B sales, are often made by ‘System 1‘ ..the part of the brain that uses well worn rules of thumb to make judgements. Ever heard the expression ‘Too good to be true’ ?… ever heard it said about a price?… that’s System 1 at work.

On those occasions when we do employ market researchers, these are the rules we tend to follow:

Try to replicate the purchase environment – if you make most of your sales online, use a mock up page with the same choice architecture and sit the respondent in front of it. Alternatively capture the respondents as close to the actual point of sale as you can. We famously set up a qualitative research operation for National Trust in a medieval jousting tent in the bailey of Corfe Castle to capture visitors decision-making criteria just as they came across the drawbridge.

Don’t ask directly about price – this sets off a flurry of thinking in the respondent trying to work out what to say to make their next purchase cheaper. It is much better to beat around the bush and lose the price issue in other stuff about their views on the product and competition.

Listen hard to the language – Quantitative research is really bad at this… online survey monkeys and the like are even worse. I want to hear how people talk about price “it’s about five quid isn’t it?” is not the same as a box ticked saying £5…. it means ‘I would be expecting to pay anywhere between £4.45 and £5.65’ (the latter would give you a 13% higher price than the £5 result from the quant survey).

Listen hard for benchmarks – If a respondent says “That sounds expensive” ask “What makes you say that?”. Their answer will often tell you what they are comparing your price to. You will be surprised how infrequently this is your actual competition.

Better still, forget the research and…

Watch behaviour rather than ask about it – People have a habit of post-rationalising decisions made instinctively to avoid the embarrassment of not being seen to apply logic. In our book what people do always trumps what people say they do. Simple market tests and a careful look at sales history will always give a more reliable answer.

I am afraid that much of the market research industry is trying to mathemtise human behaviour so that accountants and economists can claim to have a definitive answer to underpin decisions. Rather joyfully the human race does not think in scales of one to ten.. (one being completely dissatisfied).

On more than one occasion we have declined requests to provide market research data on pricing. We suspect that the client was trying to gain evidence to support a decision they had already made.

After all if all of human decision-making could be reduced to a set of cross-tab tables and price elasticity graph, life would not only be boring but the levers we could pull in our commercial endeavours would be limited to changing one number.

There is nothing more guaranteed to reduce your price than a demoralised sales team with discretion to discount… except perhaps a demoralised sales team behind budget who need their bonus to pay the mortgage.

Modern CRM systems are very good at measuring conversion rate and delivering it as a metric with which the management can beat the sales team. Consider a 20% win rate. It sounds bad doesn’t it. It feels bad for the salespeople…. four out of five people have told them to get lost. But what if there were eight similar competitors approaching all the available customers in the market. In this case 20% is above what we would call ‘natural share’ and actually demonstrates that your sales team (or the company’s product) must be doing something right.

It is difficult for both companies and sales people to take this positive view. A sales person’s perspective is governed, not by statistics, but by the last two or three people they spoke to. If one those is negative about quality, service or product features, the average person will struggle to re-set the dials before their next call. Even the best salespeople cannot avoid storing these negative comments somewhere deep in their subconscious.

It is not too bad if you are the market leader with a fabulous product that everybody wants, but if you are trying to sell for an also-ran player in a busy market, these objections corner you into turning to discounting to try to win business.

Given enough rope to discount, a sales person will keep on trying to win on price when perhaps price is not the issue. Compound this with an incentive scheme that rewards winning deals never mind the price, then the only way is down.

Eventually your business winds up at a price level that feels too cheap for customers and you still don’t win any business.

How do you get out of this downward spiral?…. four steps:

1. Find something that truly differentiates your product and make sure your salespeople understand it.
2. Identify those customers who will value whatever it is.
3. Fix the price based on value and allow no discounting.
4. Make sure the sales team only go after these customers. This means improving their discovery skills to enable them to identify suitable customers.

Magically the conversion rate will go up… once it hits 40-50% your salespeople will think they are the bees’-knees.

Occasionally we get approached by the CFO rather than the CEO. What is usually on their mind is a need to ‘tidy-up’ pricing in their business. You see hundreds of different prices for different products to different customers seems unnecessary and confusing to them.

It is true that the price file in most mature companies is a deal more complex than it needs to be and could stand some sorting out. However, the CFO is usually forgetting something. They seem to think that the tidy up is an administrative exercise performed by someone sitting at a computer staring at a spreadsheet.

We sometimes have fun shattering this illusion by asking a simple question: “If we are going to harmonise the prices for you, would you like us to harmonise them up or down?”

It takes a mere moment of thought before they say “Up please”. Whereupon, we say “Then someone is going to have to tell some customers they are going to get a price increase… hadn’t we better talk to the Sales Director?”

It had not occurred to them that generally speaking (but not always) customers notice price movements.

A price file filled with lots of different prices might be a sign that someone has carefully assessed the sensitivity of each customer and each product and priced it accordingly. If this were true, the more price combinations the better in theory. However in our experience much of the untidiness comes from poor attempts to price by badly trained salespeople and then negotiated down by customers. Often the deal was done years ago against a promise of mind-boggling volumes that never materialised in a marketplace with different dynamics and a different competitive landscape…. just nobody has had the gumption to go back to the customer and re-negotiate an up-to-date appropriate price.

Tidying up a complex price file can make you a fortune. But our advice is let’s get the Sales Director in on the project at the outset… because sooner or later we are going to need him.

…unless of course you really want to harmonise prices to the lowest common denominator. In which case you probably don’t need our help.

It is a bit of a common theme… about a third of new clients come to us and ask us to measure their price elasticity of demand… the amount their volume would drop or increase if they changed their price.

Bless them, they don’t know any better. It is the only thing they remember about price from their economics GCSE. But it is the wrong question to ask. Sure, if you put your price up some customers would probably (but not always) go away. The right question is ‘which would stay?’

I am afraid I struggle with neo-classical economics. Our experience of customer behaviour is never as simple as they would make out. Decisions are seldom based on all available information; seldom logical, rational or driven by utility value. If they were, vast swathes of the economy would have to shut down overnight.

Nobody would buy a Dolce and Gabana handbag, you would see the womenfolk of Knightsbridge carrying their belongings in 5p Tesco carrier bags.

Households would switch their electricity and gas suppliers every four to six weeks and British Gas would be on its knees.

Everyone employed in marketing or sales would find themselves on the dole and Apple would not be the most successful brand in the world.

The other problem with this request is that it requires at least three data points to plot from empirical data in order to draw a curve (two would be a straight line). Although some high volume online businesses can flex their price on a daily basis, for most firms this is simply not possible…. the number transactions is too small or you would simply annoy customers by moving the price all the time.

Our advice is to start from the other end of the thought process and ask the question how far can we move price without losing any customers. Then look at the type of customers you think would be first to go and price them separately…. and keep doing this until you have segmented you customer base.

Keep in mind our motto at Burgin Associates:

Some of your customers would have been perfectly happy to pay higher prices… the trick is to know which ones!

We will offer a modest reward and some online kudos to anyone who can accurately translate this into Latin for our coat of arms.

The price someone is prepared to pay resides in their mind, not in your desk calculator and not in your head. This little story shows how when your mind is free from the angst of winning the business you can often get a better price.

Yesterday I was with some customer-facing staff from one of our clients talking about real-life situations where they had managed to get a customer to pay a little bit more.

One of the women described an enquiry that had come in from a customer she had dealt with in the past. She didn’t like him. He was always brusque with her and whenever he had a technical question he demanded to talk to a man as he assumed that her gender precluded her from understanding the technical products she had been selling for years. You can imagine how annoyed this would make a strong and capable woman like our friend.

His second mistake (the first; being rude to her previously) was the barrage he let fly at her to make her understand how just how urgently he needed the product. Having made his point he put the phone down without so much as a please or thank you.

The enquiry was for a product she knew well and could acquire for him quickly and cheaply. All she had to do was to decide how much he should pay.

She added her usual mark-up and looked at the figure. She remembered how rude he was to her… and she added a bit more… then she remembered how desperate he was… and she added a bit more… then with a smile, she pictured him with steam coming out of his ears when he realised that he had no choice but to buy from her…. and she added a bit more.

After letting him stew for ten minutes or so, she called him back. Putting on her best telephone voice and a knowing smile, she told him that she had managed to track down a supply of the product he needed so desperately and she would pull out all the stops to get it to him the same afternoon… then she told him the price (now about four times as much as she would have normally charged). It was still a relatively small amount in his scheme of things and the value of getting the parts to him the same afternoon was that he could get on and finish the job. He didn’t flinch. He placed the order and for once actually thanked her.

There are several morals to this story:

Firstly, don’t be rude to suppliers’ staff if they have discretion to set prices.

Secondly, for people in a hurry time is money and they will pay to save it.

Thirdly, and most importantly, becuase she really didn’t care whether he bought from her or not, her desire to make the sale was taken out of the equation…. all that was left was his desire to buy. It turned out that his desire to buy could be measured in a price that was four times what she would have charged to a customer whose business she really wanted. This means that you should concentrate on what is in the customer’s head not yours… how is he or she benchmarking your price, what are the circumstances of the purchase, what value will he or she derive from the product (including the service you can give), does he or she know where else to go?

I am not saying that you should price customers based on their attitude, although I have a sneaking admiration for her approach. However what this does show is that a polite customer asking for the same product in the same circumstances would have also probably paid four times more than the normal mark-up. It is only when you are genuinely ambivalent about winning the business do you actually push the envelope on price.

Have you ever priced a customer to go away only to find they didn’t?

Perhaps you have a product that is so unique that you cannot begin to imagine how much you can charge for it. Perhaps it is a software product that has no direct cost attached to it… so there are no clues to be had there… it is always going to be a 100% margin product whatever the price. Perhaps it is a service for which the customer will have no obvious benchmark. Here is a little technique to help you come up with a figure. We call it Relative Value Comparison and this is how you go about it:

Firstly figure out what benefits your product can deliver that could be expressed financial terms e.g. profit made, money saved, time saved, new customers won.

Next try to lay your hands on the kind of figures the client (or a typical client in the sector) would recognise e.g. if your product helps win new customers, then find out what revenue they would expect from an average customer.

Then craft a little sentence that starts with “If our product only….”

Something like:

“If our product only wins you three more customers worth £20k a year, then isn’t it worth giving it a try for £x”

or

“If our product only prevents one breakdown in its twenty year life, if that breakdown results in 24 hours of downtime at a cost of £3,000 an hour that is £72,000. Isn’t it worth avoiding that for £x”

Once you have done this, you need to read the statement quickly out loud and without really thinking about it, put in a value for x that seems to make sense. If you are democratic soul have a few colleagues do the same.

This little trick is a good way to find a price that ‘sounds right’ in the context of the selling process. If it sounds right in your head, then the chances are that it will sound right if made as part of similar justification to a prospective customer.

WARNING: The technique does not work if you then plonk the price on your website without the justification.

The moral of the story is that: The means by which you justify value is at least as important as the price figure itself.

PS The technique also works when justifying a higher price than a competitor. Craft a statement that values the risk of an inferior product. “If our product only saves you having to…. Isn’t it worth just another £20 to be sure you wont need to”