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. But to be successful, value-based pricing requires having clearly defined benefits that differentiate you from the competition.
Successful implementation of this strategy requires a combination of hard work, patience, confidence and a little bit of luck. As you move down the road of success for value-based pricing, the first key to success to reach that final destination is to do the required heavy lifting.
Unlike cost-based (or cost-plus) pricing, which only requires a percent markup over costs, value-based pricing requires that you compile a full inventory of the benefits offered to your customers during the price discovery process.
This is the “heavy lifting” that requires you to leave the office and meet with key prospects. Talk not only to the economic buyers, but also survey the end users, the influencers and the key recommenders. They all have a stake in the buying process and they all have their own opinions as to the actual value of your product or offering. And don’t forget to ask about your competitors—talking to your potential buyers is sometimes the best way to glean information about the competition.
See which value propositions resonate best with your audience. Find out what existing products are out there and how much perceived value they add. Gather data on how they are priced. As you collect this data from your audience, you will begin to have a better feel for the perceived value of your product.
In new markets, sometimes the value is determined by the cost of alternative solutions available to the customer. These alternative solutions can be anything from internal development within the buyer’s organization to, in some cases, many different products that are currently being purchased by the buyer that can be replaced by a single product or offering.
Another area to examine is the non-product features that prospects might highly value. Depending on the offering, unique services can add significantly to the value of your product. Additionally, other non-product features, such as offering easy availability and fast delivery through distribution channels, should not be forgotten. You might be surprised at the value that some buyers place in these non-product features. But you will never know unless you go out and ask.
In the end, this will be an iterative process that may seem to be as much art as science. And remember, you are not selling the product here; rather, you are going out and having discussions about perceived value among key members of the buyer community.
Here’s the takeaway: Firms that utilize value-based pricing must do the “heavy lifting” to create a credible value proposition that communicates to the customer the value of the offering.
