Repeating what was said yesterday, 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.
The second key to success for value-based pricing is: Don’t not taint the decision-making process.
Determining the value of your product involves both collecting hard data and mixing it in with a number of different intangibles. It’s an internal discussion that takes place among the various stakeholders immediately after the data has been collected.
The one piece of data that should never be part of this early discussion is the cost of building the product. One of the biggest mistakes you can make during the pricing process is to taint your decision-making process by introducing cost information into the discussion.
William Davidow, author of the classic marketing book Marketing High Technology, says this about the conflicts inherent in introducing cost data into a value-based pricing discussion:
“When a marketing department is given cost information about a product, it will tend to rely heavily on that information in determining the value of the product to a customer. I’ve long believed that the first pass at pricing a product should be made without foreknowledge of what the product will cost to manufacture. When a marketing department knows the cost and market acceptable to the company, it will use that data to determine a price acceptable to the company rather than one to the market. If you are interested in finding out if your company is guilty of pricing by computation, try this experiment. Deprive your marketing department of cost information during a pricing exercise and see how much agony it produces in the group. The experiment will quickly bring that problem to the surface.”
Resist the temptation to take shortcuts in your pricing analysis discussions. While including internal production costs into the later stages of the discussion is necessary, introducing the cost information too soon into the pricing analysis will taint the outcome and eventually result in money being left on the table.
Here’s the takeaway: Introducing cost information too early into the pricing discussion generally results in money being left on the table. No matter what the pressure might be to do so, resist the temptation.
