Last week, pricing professionals gathered in downtown Pittsburgh to share insights, trends, and best practices for pricing. The event, hosted by the Western PA Pricing Professionals Group and The Pricing Cloud, featured a breakfast panel and presentations on topics that included the power of value-based pricing and best practices for value modeling. We observed three key themes that emerged from the conference:
An organization-wide transformation to a value-based pricing strategy can seem daunting. However, David Dvorin, Senior Operating Executive from Welsh, Carson, Anderson & Stowe suggests implementing in small bites. He recommends starting with just one product or even just one sale rep to establish a success story which can provide direction to scale larger scale change. Change management need not be a long-term process. In fact, in his experience in managing his firm’s portfolio, there is often an urgent need to produce the quick win.
Avoid competitive pricing as a regular practice
Stephan Liozu, author of Innovation in Pricing: Contemporary Theories and Best Practices, evangelized value-based pricing as the most effective mechanism for increasing profitability through pricing. But if your organization is unable to invest in value-based pricing, the cost-plus method is not a bad alternative. The number one priority of any value-based strategy is profitability. So even though it may have a bad reputation in pricing circles, if you can achieve your profit goals through cost-plus, that’s a good thing. However, with competitive pricing, you are taking on a purely reactive strategy, ceding control of your strategy to the competition and will risk the possibility that your competitors will lead you down a path to highly unprofitable pricing.
Value modeling is critical for success in value-based pricing
LeveragePoint’s own Ed Arnold emphasized that value models are the foundation of any value-based pricing strategy. Otherwise, customers will compare your price tag to competitive alternatives rather than your value tag. The good news is that any business person can create one by following the steps of Economic Value Estimation (EVE) developed by industry guru, Tom Nagle. By taking a customer-focused approach, you can uncover both the straightforward drivers of value, like reduced energy costs as well as more subtle (and often more powerful) value drivers, such as reduced risk of downtime.