Many buyers are concerned when they hear that one of their suppliers has a new focus on pricing excellence and is implementing pricing software, whether this be a value-based platform like LeveragePoint or an analytics and optimization platform from PROS, Vendavo, Zilliant or Vistaar. Pricing is seen as a zero-sum game – if the price goes up the seller wins and the buyer loses. One result of this perception is that companies implementing pricing software or pricing excellence programs are reluctant to talk about it. This slows the spread of pricing excellence through the economy as companies are acting in secret and cannot learn from each other.
But is it true that pricing excellence only benefits the buyer? We posed this question on the Professional Pricing Society’s LinkedIn Group back in late April and there has been an interesting discussion over the past month that us well worth joining. Some of the key points made were as follows:
Changing the Price Structure Can Benefit Buyer and Seller
When aggregated across many negotiations buyer feedback can result in making changes to better align the component pricing approach with the buyer’s purchasing needs and value perception. In this way, buyers benefit from greater flexibility and less risk even though this does not have to result in a reduction of the resulting price for the overall purchase.
Pricing Excellence (and Discipline) Results in Fairness for Buyers
Pricing excellence results in fairness for buyers. Companies that succeed in achieving pricing excellence allow buyers to be confident that their own competitors are competing on similar cost structures. Over time, this increases competition on innovation, which benefits all market participants. If price is properly aligned to value, the fairness in the relationship is also transparent to the buyer. They should be willing to pay what the vendor is charging since they are confident that they are getting a fair return on investment.
Buyers also benefit by the inherent fairness that results from proper price segmentation and price optimization. The price sought by the seller represents the market-aligned price and the same treatment that will be given to other similar buyers.
Another benefit, with consistent pricing the individual buyer gets inherited power from the collective negotiating skills of all buyers in the price segment who came before and have negotiated the sellers target price to a given point, i.e. it’s market-aligned point.
Value-Based Pricing Builds Trust
Selling on the basis of value can only happen where a relationship of trust exists between buyer and seller. In such situations there should be a free flow of information between the two so understanding what the buyer’s criteria are should not be an issue. Additionally, it is in the buyer’s interests that the seller knows their criteria, because on that basis they can be reasonably confident that those criteria will be met.
A Focus on Value Can Grow the Pie
From a value-based perspective, the focus is on how to create differentiated value for the customer. Clearly part of that value has to be captured into price, but not all of it. The more companies base their pricing on value the more value they will create for their customers. Some buyers encourage suppliers to adopt value-based pricing as they want their suppliers to be creating differentiated value for them (that they can capture and use to create value for their own customers).
Lack of Pricing Discipline Can Destroy the Long-term Value of a Market
Pricing excellence implies rational, value-based pricing throughout the supply chain. This is essential to well-functioning markets and long-term stability. Short-term pricing strategies can destroy price quality. Typically driven by attempts to grab share or prop up sagging revenues, the end result is market distortion which erodes the relationship between price and value and leads to increased instability. The commodification of products and the destruction of the relationship between price and value can lead to reduction in the number of suppliers or in the quality/variety of products offered or both.
So there are some good reasons that a focus on pricing excellence can benefit buyer and seller. As we noted in a post earlier this year, value-based pricing can drive innovation in the supply chain. And our next webinar, with Tom Lucke on June 4, will focus on Driving Value Upstream into New Product Development. Building pricing excellence is in everyone’s interest and will strengthen the economy as a whole!