Creating a pricing strategy can’t just be an afterthought to a marketing strategy. And it requires more information than is available from “price management” software, which focuses on enabling better transaction management but provides little insight into what customers value and why. To create a value-based pricing strategy, the thought process must be different. Instead of looking at profitability only with respect to a product, enterprises must seek to understand profitability with respect to customers, sales regions and sales reps. Why is one region less profitable than another? Why does one sales rep consistently sell at lower margins than another? The profitability of a portfolio of products is derived from the profitability on a portfolio of customer applications and purchase occasions that generate different levels of value and thus, ideally, different amounts of revenue.
Value-based Pricing requires price metrics that naturally align with variations in value to the customer. For example, aircraft engine manufacturers changed from leasing engines by the month to essentially renting them by the hour flown because that aligned the revenue earned per engine better with the value of increased fuel efficiency across different routes. Value-based Pricing requires creating price policies that encourage good customer behaviors and discourage bad ones. They create rebates for customer loyalty, for example, as an alternative to matching lower prices when under threat. The former discourages customers from soliciting competitive bids, while the latter encourages them to do so. You also need to communicate the value of features and service enhancements in terms of impact on the customer and translate that impact into monetary terms. Obviously, there is much more to pricing strategically than just setting prices.
To move toward strategic management of pricing, you need to get to the point with all of the major segments that that you sell into where you understand:
- What are the drivers of value?
- How do drivers of value vary across different customer or usage segments?
- How can you quantify those values so that you can build value stories and value-based price metrics to align with them?
That’s where a collaborative platform can add a lot. Having a common framework and a collaborative tool helps turn customer value into a common language and enables teams to draw on repositories of data and the previous work of others.
Note, this post was adapted from “Emerging from the Great Recession: 8 Keys to Driving Profit Growth and Customer Value from the C-Suite” by Dr. Thomas Nagle. Download the white paper to get more insights from Dr. Nagle and understand how to build a customer value-based organization, and bring value to pricing, sales, and product innovation.