Pricing is the strongest profit driver available to management. One percent improvement in price yields much higher operating profit improvement than e.g. one percent improvement in units sold, unit costs or fixed costs. Therefore, price increases should come regularly and at the very least annually. Also, almost all countries and markets have inflation, so as a minimum you should plan price increases in line with inflation. But a true price increase strategy reflects the value perceived by customers and price you as a result can harvest.
Determining the next best alternative price is an important factor of value-based pricing. The next best alternatives price serves a comparison point for companies when they determine a value-based price for their new products. Firms determine the value of their product or service by comparing to the next best alternative product or service. A product is seen as valuable if it has better features and performs better than other products in the market, regardless of what the alternative product actually costs.
Value drivers are product or service features that improve the perception of the product or service a business is trying to sell and can help businesses grow substantially. Value drivers include technological features, brand awareness, and customer satisfaction. Value drivers are also what set a firm's product or service apart from its competitors, acting as a competitive advantage. Value drivers also give the added impression that a company's product or service is better than their competitors. Value drivers allow companies to influence their customer base to purchase their product or service. The distinctive traits that a business' product has will thus make said product look more attractive than its competitors. Once a company has figured out which value drivers boost its profits and its standing amongst competitors, it can use those value drivers to implement successful pricing increases.
That value-based pricing offers a great avenue to strong prices and significant profits is probably clear in many pricing practitioners' minds. But what is also important to remember is that a value-based pricing strategy should be data-driven: data about customers' willingness-to-pay. Data about value drivers. Data about customer segments. And not just a single global set of data, but for each market where the product or service is sold.
Value-Based Pricing strategy and implementation is frequently described along 5 C's:
- Comprehend the things the customers value: Begin differentiating from competitors by understanding customers’ needs better than the competitors do. When mastered it is much easier to differentiate and communicate value
- Create value for the customer: Define and design a differentiated offering that addresses the customers’ requirements more effectively than competitors’ solutions can.
- Capture value through effective pricing: Create prices and price structures that accurately depict the value of a product by using knowledge of the product, and its value to the customer.
- Communicate the value: Put together powerful, persuasive value propositions that distinctly communicate value to the customer. Make them recognize that you have taken the time to understand their needs, and create the value that they require
- Convince customers that your value is worth paying for: Confidence is vital in order to convince the customer that the price is right. When the customer inevitably says that the offering is too expensive, instead of immediately giving them a discount, salespeople should be confident and reply, “Well look, when you think about the value that we deliver I would actually go as far as to say not only aren’t we expensive, we’re probably not charging quite enough.”
Research on willingness-to-pay can help with several of those areas.
Take the Guesswork out of Pricing
Do you have the right price for existing products or services? Do you know what the price should be for a new product yet to be launched? Are your customers willing to pay more for a given set of benefits? If you measure willingness-to-pay scientifically you will be able to answer all of those questions. Yet, still 88% of all companies admit that their pricing process is at least in part based on guesswork, without knowing what customers value and how much they are willing to pay for an overall product, or for a given set of features.
On Monday the 26th, our co-founder Finn Helmo Hansen is conducting a webinar about how to use price research when establishing, implementing and maintaining a value-based pricing strategy.
We are excited to announce a new webinar about how to use price research when establishing, implementing and maintaining a value-based pricing strategy.
Launching new products or services can be a daunting task. With everything from product development, marketing, sales training, customer communication, as well setting the price. Price research can help in various ways with these challenges.