As we noted in an earlier post, a successful value-based pricing strategy involves five components. Those effective strategies incorporate customer value with the value management elements of value creation and value communication. So what exactly are these elements?
Value creation involves including only those elements in a product or service that a fully-informed customer should be willing to pay for — which is what we call “value”. The term “should be” is used because what customers will actually pay depends upon how the product is marketed and is usually somewhat short of the full value. A great new product that promises huge benefits is only a promise. For example, willingness-to-pay will fall short of value, but will move much closer to value if the product comes with a money-back performance guarantee.
Aligning what you offer with what customers value requires modeling the impact of the various benefits on a customer’s economics. For B2B customers, the process is conceptually easy using the Economic Value Estimation® (introduced in the renowned pricing book – The Strategy and Tactics of Pricing) or “economic value to the customer” method. It is not a measure of the price you can charge, but a measure of the relative price potential that a feature or service enhancement could represent for different segments of customers. Companies that lack a way to interject a measure of value into their product development process have a tendency to create products that represent “the best that money can buy”, rather than products that represent the “best value” that customers will buy.
Value communication involves communicating credibly, in monetary terms, the differentiating benefits of your product. The goal, particularly for a higher-priced product, is to establish for the customer the “value” identified during the value creation stage. Without that, you run the risk that the purchasing department does not know the value of your differentiating benefits to their company, or that they will not acknowledge the value, even if they do know what it is. Once you have established the economic value, or at least have opened a discussion about what it is, you no longer need to justify your price premium relative to the competition. Instead, you can sell or promote your discount relative to the added value that you deliver. Or, to describe value communication in the negative, you can show that your lower-priced competitors are none-the-less overpriced because the savings from buying their products is insufficient to compensate for the value lost by not buying your product!
In order to implement and execute a successful value-based strategy, it is critical that you address value management—not just price management—systemically. Failure to include an understanding of value in offer development and customer communication activities will result in a disconnect between what product teams are building, what marketing is communicating, and what sales is selling, leading to fewer profitable sales and poorer financial performance.