As we’ve said before in previous posts here and here, value-based pricing is the ultimate objective for most organizations. It’s what enables successful firms to charge above-average industry margins for their products that ultimately drive superior bottom-line results.
The final key to success is remember that the first sale is always to your sales force.
Nothing can sink value-based pricing faster than having a sales force that has not bought into the strategy. This means that the sales force has to believe deep down that prices reflect the value that is created for their customers. If they don’t, they will be easy prey to discounting pressures once buyers recognize this lack of confidence. Because of this, the first sale always has to be to your sales force.
So why is this buy-in so challenging? One reason is that the data behind value-based pricing is significantly harder to wrap your hands around. Most of it is based off of conversations with the different members of the buyer community (users, buyers, decision makers, etc.) about value—which results in data that is much more subjective. Contrast this with the experience of most cost and cost-plus strategies where pricing is based off of much more objective data—such as internal production costs—and desired margins. Information that is much easier to understand results in prices that are much easier to defend.
Instilling the necessary confidence in your sales force to successfully execute value-based pricing is hard work. It takes time and, sometimes, specialized training. And it’s not going to happen just in a two-hour pricing strategy meeting that typically occurs at the end of the annual sales launch.
The key is to ensure that the sales force understands the value provided to their customers. This value, again, comes from a detailed analysis of the product, the competitive environment and the particular needs of the customer. Your sales force has to be absolutely confident both in the underlying pricing and that the value proposition they use will resonate with their customers.
One of the worst outcomes for a value-based pricing strategy happens when sales professionals are not ready for it. When this occurs, high-value features and services are given away and discounting soon follows. This typically results in an undesired—and impossible to stop—movement back to lower-margin cost-based pricing.
Here’s the takeaway: Firms that utilize value-based pricing need to create a credible value proposition that communicates to the customer the value of the offering. This value proposition must be based on credible and untainted information that comes from various outside sources: buyers, competitors and alternate products in use today. Once a strategy is developed, the first and most important sale is always to the sales force.
