Value based pricing is not an Excel-based optimization exercise. It touches upon a wide variety of topics, ranging from building deep understanding of what drives value for the customer to leadership behaviour. And ranging from communicating benefits in an effective way to customers (‘value selling’), to optimizing price setting procedures and incentive schemes for sales people.
In this post we share some insights of our journey that might be useful for other companies that embarked on the road towards value based pricing.
Understanding what drives value for the customer
Value based pricing starts with understanding what represents value for the customer, as this drives his willingness to pay. So we started with an analysis of the market through a value lens. Key questions: what value does the company provide to the customer, how is value perception varying between market segments, how is the clients’ context impacting the value that he attributes to specific aspects of the company’s offering?
Together with the sales teams that serve specific market segments, we investigated what criteria customers take into account when making a purchasing decision and how they weigh the different criteria. Beforehand we asked the sales reps to write down what they thought would be the research outcomes. It is always insightful to become aware of your assumptions and to validate these, as in most cases we find significant gaps between perception and reality.
Setting the price
Part of Losberger De Boers products are standardized, but a big part of the company’s activities is related to tailor made solutions. How to set prices when every ‘product’ is different? We developed a price logic that structures the decision making process of setting a price.
The price logic is made of three parts:
- The ‘bundle of benefits’ that the company offers. It is essential to understand the benefits that the company offers in the clients perception. Our experience is that sales people are not always aware of the different type of benefits that their company delivers. E.g.: if your company offers on site support of highly qualified technical people, that is a benefit for your customer that might impact his willingness to pay. We often find that a company offers services that are included in the standard way of working of this company, but are not offered by competitors, e.g. high degree of customization or level of guarantees.
- External drivers. There might be external drivers that impact your price setting. Why not adapt your price when you know that there will be short term supply shortages in the market? And what to do when two customers ask for a product, and you know that you can never do good with client A as he is a real challenge to cooperate with, while customer B feels like a long-time partner?
- Internal drivers. Price setting is also affected by internal considerations. Think of willingness to win a contract because of fit with the company’s strategy. Or availability of stock and staff. Like Elon Musk’s tweet below, saying that Hertz wanting to order 100.000 cars (!) will not impact the margin as Tesla at that moment had far more demand than production.
Based upon the price logic, we developed tooling to structure the price setting process, provide price setting guidance and facilitate an evaluation framework. Sales people were trained in using the new methodology, in live training sessions and tailor made e-learning. This clearly helped to professionalize the price setting process.
What if your company’s offering is superior to that of your competitors, but your client does not see the difference? A lot of product focused organizations show a strong tendency to continuously invest in product improvement, which is a great thing in itself. But are your customers aware of these improvements, and are they capable of estimating how they benefit from it? The best companies don’t sell features, they sell benefits.
We helped the teams of Losberger De Boer to identify their features-advantages-benefits per market segment, and to improve the effectiveness of their communication through attractive proposals.
Onno Koole is the Group Marketing Director and responsible for the company’s marketing strategy, branding and transition in the marketing organization.