Ibbaka helps you execute on value-based pricing. This is a pricing strategy where your price is based on the differentiated value you provide to your customers. The alternatives to value-based pricing are cost-plus pricing (good for contracts where the deliverables are poorly defined and controlled by the client), transactional pricing (what happens with commodities), market following pricing (if you have little pricing power) and various forms of auctions (growing in importance as M2M pricing becomes more common).
Use value-based pricing when your offer has meaningful differentiation from your customer's alternatives.
There are some critical concepts buried in that simple sentence.
Offer: what you are selling is more than your product or the subscription. It is all of the other things that you wrap around it: support, a community, training, data services, consulting... The whole product/solution has many attributes and all of the contribute to value.
Value: this sometimes seems like a slippery concept as it has two aspects, economic and emotional. Economic value is the impact you have on your customer's business. Do you help them increase sales by accelerating the sales cycle or improving conversion rates? Do you reduce operating costs by improving process efficiencies? There are two main ways to understand and convey your economic value. Return on Investment models (ROI) and Economic Value Estimation (EVE). ROI is good for comparing very different solutions, but EVE gives a more nuanced understanding. We will look more closely at EVE in future posts, but if you can't wait check out the LeveragePoint website. Emotional value is also critical, even in B2B sales. People buy based on emotion, because it will help them realize some aspiration or at least to sleep more soundly. Value, specifically differentiated value, is the foundation of pricing.
Customer: value is always for a specific customer. Customer can be tricky in B2B where there are often a number of different buyers (business buyer, technical buyer, procurement) and the buyer is not always the user. The interests of all the different buyers and the value that resonates with them needs to be mapped out. Even with procurement there is an emotional component to value.
Alternatives: Pricing is always relative to an alternative, and your customer always has an alternative. The alternative could be your direct competitor, but it is often an internal solution the customer could built themselves or even just doing what they do today. For innovators, the staus quo is often the main competitor!
So, if your offer has meaningful differentiation, you should be executing on a value-based pricing strategy.
What are the key business questions you need to be able to answer in order to do this?
The Key Business Questions for Value-Based Pricing
Customer focussed questions
1. Who should your customer be?
2. How does that customer get value from your offer?
3. What kinds of value matter to these customers?
4. What are their alternatives?
5. How does the customer buy?
6. Can you group customers into segments?
7. Which segments should you target and in which order?
Value focussed questions
8. What are the value metrics for your offer? (The unit of consumption that correlates with how the buyer and user get power.)
9. What are the pricing metrics? (The unit by which your customer pays for your offer.)
The connection between pricing and value
10. Does your pricing metric track your value metrics?
The pricing architecture and pricing model
11. Do you need a tiered pricing architecture?
12. If you need a tiered pricing architecture, how many tiers and what is the role of each tier?
13. Are the tiers actually performing their designed role?
14. After you have set prices, how will you monitor them relative to (i) your customer's response, (ii) competitor reactions (you want to be shaping market pricing and not responding), (iii) the contribution of your pricing to your overall goals for customer lifetime value and customer acquisition costs?
15. Does your discount strategy support your overall value messaging and pricing strategy or does it undermine it?
At the end of the day, you need to be able connect the value you provide to your customer, with the price you charge and with how the customer is using the offer. The emerging best practice is to connect your value model and usage model to your pricing model and to understand the interactions between them. Pricing is finding new ways to gather and use data to inform decisions and predict revenue. Ibbaka can help you to apply these best practices and to answer the key business questions.