Value is the Most Powerful Pricing Optimization Lever!

by | May 7, 2012 | Pricing, Quantify Customer Value, Why LeveragePoint?

HomeBlogQuantify Customer ValueValue is the Most Powerful Pricing Optimization Lever!

Companies invest in pricing software for many reasons, but one of the most common is the desire to optimize prices at a granular level, and charging the “right price” for each customer. But what is the right price, and how can one know one has firstly set that price, and then actually captured it in the sales negotiation?

At LeveragePoint we tackle this critical business challenge using value-based pricing and sales. We say “pricing and sales” because in most B2B transactions the actual price is negotiated by sales with the customer. Value-based pricing uses insight into the economic value of your offer for a specific customer (or segment) relative to the next best competitive alternative. Each of these components are critical and without each of them you cannot do value-based pricing.

  • Economic Value: How does you solution give your customer an economic benefit, measured in dollars, relative to the alternative. B2B sales are economic sales.
  • Specific Customer: Your customer cares about its own business, and you have to be able to create Unique Value Propositions that the customer finds relevant and credible
  • Relative to Alternative: Your customer always has a choice, and the market sets the price of this alternative. You cannot ignore the market just because you are focused on the customer.

Some pricing software tries to estimate Willingness to Pay from transactional data and use this as a proxy for value. Understanding WTP can be a useful diagnostic. If you have apparently similar customers that are paying different prices it is important to know this and to understand why. But it is NOT a proxy for value. It is quite possible that similar customers are charged different prices because they receive different value. No transactional pricing system contains the data to answer this question for you. You have to use a value model to do that.

And once you have identified customers that should be paying more, because they are receiving differentiated value and they are paying less than other similar companies, you need to support your sales force in winning this higher price. Just telling them that your pricing software has found that this customer should have a higher “willingness to pay” does not help your sales people or give them the tools they need to negotiate a higher price. But value-based pricing does. It provides sales with the three or four critical value messages that explain how your solution is superior, in dollar terms, to your competitor. That is something sales people can use!

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