Setting the price of a product according to the value it provides to the customer and not, for example, based on its manufacturing costs – that’s what we call value pricing. The topic isn’t new. But still, many companies aren’t really sure how to implement value pricing.
We can learn a lot from the ancient Romans: Apart from culture, philosophy, and politics – it seems to be that they were also adept in pricing. Well, at least in Latin, the word for “price” and “value” is the same: pretium. As pricing experts, we quite agree: For a lot of companies, the most important improvement potential lies in establishing a value-selling culture.
High opportunities, poor capabilities
We were able to confirm that there are ample opportunities: In a recent webinar with about 150 participants, we asked them to rank their company’s value pricing opportunities on a scale of one (low) to seven (high). Almost 30 percent regarded them as average (four). Another 29 percent went even higher and choose five, 14 percent put down a six. But the most pressing point is implementation. Asked to assess their company’s value pricing capabilities on the same scale, 46 percent in total said their capabilities were below average, ten percent even stated them as poor. There is no silver bullet for solving this problem. But, there are a couple of steps companies can easily undertake to get better at value pricing.
Know your customer
In value pricing, there is no one size fits all solution. You need to know what your customers want to fulfil their needs and create added value for them. The magic word for this is customer segmentation. But there is most of the time no sense in sorting your customers only by descriptive criteria like size or application field. Companies rather need to do a need-based segmentation to identify only a couple of customer groups with distinct needs, a specific willingness to pay and the according pricing opportunities. These few groups then get an offering balancing between their wishes and the amount of money they are ready to spend.
When introducing differentiated, segment-specific offerings, companies quite often run into three problems:
- Customers assume in a given offering and product price all services are already included
- Customers choose to the cheapest, “lean” offer and cause prices to erode
- Customers don’t want just a differentiated offer but rather a full solution to their problems
Tackling these challenges means first and foremost more transparency. De-bundling the offerings so that customers can clearly see, which services are entailed and which aren’t, are the way to go. The webinar participants confirmed that quite often, this is not happening: More than 43 percent stated that their company includes all services in the product price. This is our experience as well: A lot of companies offer many services – have even price lists for them – but don’t charge customers that make use of them. Communicating the price for services make customers more aware of the additional value that is created by them.
Communication is key
If customers can grasp the benefits they gain by using a profit, they are willing to pay more for it: This is the basis for value pricing. Companies need to make them see the added value – this is why value communication is vital to successful value pricing. Companies need to develop compelling claims on important benefits and quantified value, but they have to be easily understandable. It’s what the customer understands that counts – a vivid language and a strong message are key. But it takes experts to do that. Right now, as the poll in our webinar showed, companies don’t have them onboard: Around 78 percent do not have a dedicated function for value communication. That is something a lot of companies can change relatively easy – whether in-house or with the help of external experts – so to have that kind of knowledge resource at their disposal in the future.