Value Based PricingArticle by Lisa Anderson, December 2, 2019
An overarching theme from our pricing and profits presentation relates to value based pricing. It was unanimous – every CEO believed that value based pricing was the best direction to go. Yet, it became muddier in figuring out how to move towards value based pricing in his/her particular situation.
Let’s start by defining value based pricing. Simply stated: prices are based on the value the customer receives.
Everyone wins. The customer gains more value and you gain a higher price. Of course, that higher price should carry a higher margin. It isn’t set up so that you win at the expense of your customer. Instead, both parties win with extra value and margin. So, if everyone wins, why don’t more of us utilize value based pricing? According to the CEOs, it isn’t simple. Yet we all agreed it is worth it.
Perhaps we’ll be talking about this for months and years to come as it can do something far more important than increase margins. It enhances customer value which can lead to customer engagement and loyalty. There are lots of statistics. Suffice it to say, we will be much happier and are willing to spend more to do business with companies that deliver excellent customer service. And, more engaged and happy customers are dramatically more profitable.
After all, it can be 2 to 25 times more expensive to acquire a new customer than to keep a current one.
Start by figuring out the value of your product or service. Don’t listen solely to your R&D department, sales resources or anyone else while trying to understand value. Don’t even listen to your customers. Instead, think about your target customers and probe the value to these customers. Ask. Listen. Observe. When you ask questions, listen to what else they say. What would improve your customers’ situation? The value will emerge.