Volume Budget Trade-off methodology (VBT)

Volume Budget Trade-off methodology (VBT)
Estimating willingness to spend regarding your services or products

by Maureen Bannink and Jürgen Warnecke, SKIM Analytical - Durables & ICT

Suppose you are developing or marketing a (new) product or service. It is undoubtedly crucial to know what your (potential) customers are willing to spend on it. In traditional pricing research, consumers are simply asked which price is regarded as ‘fair' and which prices are regarded as (too) cheap or (too) expensive. Many times the outcomes differ from reality since consumers are faced with a very unfamiliar exercise: being able to set the price for a new product themselves.

Choice processes in real life and in marketing research surveys
In real life, people choose from different products and services, by comparing features / characteristics of those products / services and prices. Many researchers understand that, in order to deliver reliable results, it is important to mimic reality as much as possible during an interview. That is one of the reasons why SKIM Analytical uses Choice-Based Conjoint (CBC). Consumers are asked to choose from several products or services (consisting of different combinations of features) at different prices. As far as the respondent is concerned, the choice process is the same as in a store or supermarket. In a standard conjoint approach preferences can be measured and choice behaviour can be simulated. The simulated choice behaviour reveals which product or service best fits the (perceived) requirements of the consumer, i.e. which product offers the most value for money.

Estimating the volumes consumers will buy / use a product or service
However, volumes of the use of the product or service cannot be taken into account. Note that total cost (or total amount spent) is not an independent attribute, as it depends on the volumes of the products or services that are bought. Furthermore, the willingness to spend money on a product or service is not only based on the perceived value and perceived benefits of the product or service, but also on the total budget the consumer is prepared to allocate and on the disposable income.

The choices that consumers make consist of simultaneous trade-offs:
Between each product or service and its (variable and fixed) costs AND
Between different products / services in a product category AND
Between products / services combined and total costs AND
Between total costs spent on the products / services and the total budget available

None of the types of conjoint (CBC, ACA, CVA) is suited for this task.

To deal with these problems, SKIM Analytical has developed, tested and successfully used a new trade-off method, named ‘Volume Budget Trade-off' (VBT). This new method completely overcomes the mentioned disadvantages of a standard approach and enables the 4 different trade-offs described above by showing consequences of intended behaviour (including the volumes of use) in easy-to-grasp terms and offering the possibility to fine-tune intended behaviour.

How does it work?
Most consumers take the time to think about the consequences of their actions in reality, however, we cannot expect them to do the same in an interview. The VBT technique overcomes this problem. The respondent is presented a product, service or feature at different price points and asked for his / her intended volume of use.

After that, the implications on his / her individual spending are shown. The respondent can then adapt his or her intended behaviour. The respondent is offered not only the opportunity to adapt the use of the particular product or service discussed at that point in the interview, but can also fine-tune the use of other features, products or services (make trade-offs).



The method generates insight into price elasticities, the willingness to spend on different products and services as well as the total budget consumers are willing to spend.

Example of a VBT study
The chart below shows a fictitious outcome of a mobile services study. Services X, Y and Z were new to the market and to be introduced shortly. A representative sample of consumers were asked how many calls of which length they would make using each of these services.



The respondents were enthusiastic about the new services and stated they would use the services many times a week. This implied that their budget would be increased by $31.50 per month. After informing the respondents about these steep cost implications, the majority chose to adapt their intended use. This shows the strength of the technique.

If the researcher had regarded stated behaviour as sufficient, the outcomes would have lead to a substantial over-estimation of the potential of the services.

Main applications
VBT is mostly used in product development research, to estimate the willingness to spend on new services or add-on product features. It was originally developed for the mobile services market, to predict the success of new services upon introduction. Since, this method has been used for many other markets as well. The methodology enables the researcher to customise the VBT module to such an extent, that it can be exactly tailored to retrieve the particular marketing information needed.



For more information about Volume Budget Trade-Off Methodology, please contact:

Maureen Bannink
Division Manager
SKIM Analytical - Durables & ICT
+31 (0)10 282 3535
durables&ict@skimgroup.com