“In theory, there is no difference between theory and practice. But in practice, there is.”
(Benjamin Brewster)
Warren Buffett allegedly said that investing is simple, but not easy. There’s more things in life that are simple, but not easy. Like saying “I’m sorry” when you’re wrong. Or value-based pricing.
The value-based pricing method is straightforward and logical: align the price of your product or service with the perceived value it offers to your customer. And when implemented correctly, it can produce superior business results as well as high levels of customer satisfaction. But as simple as that sounds, it’s far from easy to turn the principles into practice. The challenges are similar to driving a race car at professional level: it doesn’t take too much to read the books and understand all the ideas, but going out there and applying them in the real world is a completely different proposition. I can’t help you with your race craft, but I can give you pointers on the five things you must get right to make value-based pricing work and bag the – substantial – prize.
(A quick remark before we dive in: the frame of reference for the text is B2B business, with a sales team signing sizable and somewhat bespoke enterprise deals. The five elements to master are equally applicable to e.g. an online B2C context with a large number of small ticket, self-serve customers, but the implementation would look different.)
The first thing you need to get right – and the majority of teams don’t – is a deep understanding of value. Many product managers and engineers have a pretty “inside-in” view, the former attributing value to the beauty of their features and the latter to the coolness of the technology. But ‘value’ is not some inherent property of the product. It only makes sense in relation to a paying customer. Value is only what the customer is willing to pay for, and many features will be viewed as bloat. But it is also everything they are willing to pay for, and many teams don’t think broad enough. To address this in the real world, you need to build and use a systematic value framework. We built a “Value_DNA” framework taking inspiration from Bain’s B2B value framework you can find online.
The second not-so-easy “must do” for value pricing practitioners is to quantitatively validate the value elements with real customer insights to estimate their “willingness-to-pay”. In companies with existing roles such as customer research, product management, sales… you’ll need to collaborate with these folks to organize your data projects. Where they don’t, you’ll need to build some lightweight tools and templates to substitute for their expertise. Then as you go external, you’re basically collecting data from parties who may be skeptical to share it with you (e.g. professional Procurement departments), may have incomplete or conflicting input (e.g. Developers vs Quality), or have “stated preferences” that are different from their “revealed preferences”. Every customer interaction is an opportunity to gather data! Key here is to develop a range of tools and templates to cover a wide range of situations, audiences and moments. E.g. Procurement may be very suspicious to share information just ahead of an RFQ, but they may be very open to a post mortem debrief after the deal is awarded. Or in exploratory discussions you may be mingling experts (i.e. other than sales) with the customer’s teams. Your colleagues will usually be more than willing to help you if you give them clear, simple templates to work from and weave into their own customer agenda.
A third area where value-based pricing can get hard is influencing change in your own organization. If your organization doesn’t have a history with value-based pricing, this involves communicating with senior decision makers and departments such as finance. Furthermore it’s possible your monetization models require operational changes, such as building new modes of delivering product (or supporting services), creating capability to meter product usage, or implementing new billing methods. The good and bad news is that this isn’t any different than any other cross-functional “change management” journey every company in the world wrestles with. Two things produce results: starting small, and getting help. Don’t embark on big projects but do a little, learn a lot, and build momentum from there. And if you find peers who are great at getting things done organizationally and “politics” but not to cynically serve their own interests only: befriend them and somehow engage them in your project. These folks typically have a broad internal network of likeminded allies, and you can get miracles done if you can tap into this organizational superpower.
Your next big task is to effectively communicate value. There’s three major communication channels you need to cover. Many companies get the first one quite right and that is having Marketing go out in the world with all sorts of value proposition-supporting narratives. However you have to make sure they receive the right input of what real value is. Remember our first topic: many messages are too focused on the features-and-technology stuff. The second, most critical communication channel to get right is ensuring the sales teams have everything they need to talk value, which in practice means things like creating battle cards. If you have a governance process to review and approve commercial proposals before they go out, then that’s a great way to constantly reinforce the value stories of your products. If you don’t help your sales teams “sell the customer back their own problems”, you leave them at the mercy of the customer’s Procurement department – who will very gladly narrow the focus to a one dimensional “lower price” conversation. And the work doesn’t stop once the contract is signed: the third communication channel covers product use or contract execution. Especially in domains where repeat business is susceptible to price erosion, customers’ willingness-to-pay will drift down if they aren’t regularly reminded of the value they receive.
The fifth and final test is the moment of truth, when your value-based pricing models make contact with the customer. It may not be the homerun success you were hoping for. Customers – especially the ones with a good Procurement department – will try to get a good deal and talk the price down. If your commercial proposals are forcefully rejected, don’t immediately take that as a sign value-based pricing doesn’t work. Treat it as an experiment to figure out where you’re not completely on the ball in one of the areas we highlighted. Is it not just the price but the entire proposal that doesn’t resonate? Your value analysis is probably off (#1): use the opportunity to invite detailed feedback on what’s missing (#2). The proposal has the right ideas but is scored low and you need to compete on price, undercutting your competition? Something in your organization’s operations probably has some weaknesses. You can help pinpoint what the major constraints are and influence change (#3). The value proposition is spot on and you make a strong showing on the product offering, but your sales team gets completely bamboozled in Procurement games? That’s a value communication problem (#4). You need to equip the sales team with better value arguments and battle cards, or do better value communication to the customer earlier, well ahead of the RFQ and targeting other audiences than Procurement.
If all of this sounds like hard work, that’s because it is. Value-based pricing is simple in principle, but takes skill to execute in practice (not the least the ability to collaborate across functions and disciplines). It’s well worth the effort though as the business impact is big. Pricing is the most powerful but also the most neglected growth lever. Companies either start this journey for their products and services, or accept their fate as a commodity.