Value-based pricing is based on understanding how your offer creates value for your customers. The standard way to do this is to see how you can improve their statement of profit and loss. Understanding this is a good start, but does it really enable to right conversations with your customers? In many cases the answer is no. You have to go beyond this and understand how your customer's offer helps their customers.
The key to value based pricing is trust. Your customers have to trust (believe) in your value propositions. How do you earn this trust? The best way to do this is to demonstrate that you concerned about their business and how you can make it better. You start by demonstrating understanding.
The standard approach to value-based pricing is to look for six types of positive value drivers and then to figure out how your offer has an impact that is different from the next best competitive alternative.
- Grow Revenue - How do you help your customer to grow its revenues (These tend to be the most compelling value drivers. You can help a customer expand the market, win market share, or enter new markets. More granularly you can accelerate their pipeline, improve the win rate, reduce churn and help them to grow in existing customers. Helping customers to launch new products is a revenue value driver.)
- Decrease Operating Costs - There are many ways to do this, but focus on ways to improve yields and find production efficiencies.
- Decrease Operating Capital - People often overlook this but is can have a big impact. (Look for things like reducing inventory and accelerating collections.)
- Decrease Capital Costs - Find ways to reduce fixed investments, extend the life of capital assets, prevent capital assets from going offline, convert capital costs into operating costs (in cases where this improves your customer's economics).
- Reduce Risk - This is one of the most important value drivers in an uncertain world. It can be hard to communicate though and is most effective with customers who already use formal methods to quantify risk, such as insurance financial and energy companies. Otherwise, it is often an emotional value driver rather than an economic value driver.
- Offer an Option - Many companies make a strategic choice to have options, and there is a value to being the option. Like risk, this can only be an economic value driver for customers who have ways to quantify the value of an option, otherwise, it is an emotional value driver and not an economic value driver.
(Note: In healthcare, there are three classes of value driver, economic, emotional and clinical outcomes.)
Just as you need to convince your customer of your value drivers, your customer needs to do the same with its customers. You win over customers by understanding how you help your customers deliver value to their own customers.
To do this, you have to understand how your customers segment their own markets, how they prioritize value for each of those segments and then align your value messages with their value messages and segments. You then ask how your offer makes your customers more competitive.
See if you can answer the following questions.
- How does this customer segment its market?
- What segments does it target?
- How does it create differentiated value in its target segment?
- How does my offer (i) enhance my customers' differentiated value or (ii) reduce their competitors' advantages?
- How does my market segmentation map to my customer's market segmentation? (You can get insights into your own segmentation by understanding how your customers segment their own markets and seeing if and how these align.)
Ibbaka can help you to answer these questions. We are students of value creation and can help you to better understand your customers and align your value to their value. This alignment is a powerful competitive advantage.