(Updated Feb. 8, 2017)
One of the fundamental questions of any B2B business is: How am I going to price my product or service? While this may seem like a simple question on the surface, it opens up many avenues of pricing methods. Today, we're going to focus on one method in particular: Value-based pricing.
Value-based pricing is a strategy which sets the price according to the perceived value of the product or service to the customer. This is in contrast to cost-based pricing, which prices products according to a traditional price, or based on the cost of the product.
Value-based pricing requires you to be proactive, instead of reactive. You're not setting your price because your competitor has set a similar price. You show with your price that you're not only better than your competitors, but that you also bring that extra something to the table that they may not have known that they wanted or needed.
How much does pricing actually matter? Even a small increase can make a big difference! According to one study, for the average firm, a 1% increase in price may subsequently raise profits by up to 10-12%!
Think, for example, of Coach. Why is a Coach bag so much more expensive than a regular purse? It is value-based, since its perceived value -- status, distinction, and pride-of-ownership -- is worth more to the customer than the simple cost of manufacturing.
Another great example of this is Apple. This company doesn't set its prices based on cost of materials or how much their competitors' charge. Their price is based on the value of efficiency, ease of use, and quality of life. Because customers see that value, they're happy to pay that larger price tag.
Of course, the B2C field's value based pricing will naturally vary slightly from its B2B counterpart. The basic formula, however, still holds true: Buyers want to know how your solution will impact their bottom line.
There is no magic bullet in pricing. However, maximizing our value to customers is a very good thing for both the top line and bottom line --Christopher Ryan
Let's look at how you can create your own value-based pricing guide for your products or services.
How to Create a Value-Based Pricing Guide for Your B2B Business
1. Determine a Specific Segment
In order to convey value, you need to find customers who will see that value. So who is your target audience, or segment? If you are a technology firm that provides IT services to businesses, your segment may be a small business in the healthcare field that needs cloud-based computing and security solutions. If you are an engineering consulting agency, your segment may be clients who desire modern and innovative building designs for their growing business.
If you find that you have more than one segment that would use a given product, you may need to create different prices for each of your segments.
Handpicked Related Content:
2. Compare with Alternatives
If your product or service didn't exist, what would be the next best alternative your customers would use? This gives you a point of comparison for determining a value-based price.
3. Understand the Differentiated Worth of Your Product
What sets your product or service apart from the competition? What features or offerings are unique to your solution? Do you offer more options for customization? Is it easier to use? Or do you offer a more sophisticted level of experience in your services? Got a few points in mind? Great! You're ready for the next and final step.
4. Set a Dollar Amount on that Differentiation
How much is that unique feature or service worth to your customers? How much time will it save them? How much happier will they be with the end product? Calculate what that is worth. If you have a few different unique features, you don't have to price each one. Determine an overall differentiated price for all included features.
For example, if you decide that it is worth $200, and your competitor's alternative is priced at $500, then your value-based price would be $700.
Now that you have the basic formula for determining a value-based price, let's look at some of the challenges to this method, and how your business can overcome each one.
Handpicked Related Content:
How Your B2B Can Overcome Obstacles and Establish Value-Based Pricing
Five major obstacles must be overcome in order to successfully establish value-based pricing. Knock down these barriers and you’ll have the pricing edge you’re looking for:
- Transparency – In the B2B sense, demonstrate that your team is comprised of real people who understand the true needs of a business. It’s likely your solution will have a cost or other shortcoming in comparison to the competitive alternative, so it’s important to openly (yet strategically) acknowledge these differences and then hone in on the positives. Remaining transparent not only allows the customer to decide it is a good fit, but also offers your company the ability to exceed the customer’s expectations.
- Organizational Alignment – B2B Sales and Marketing departments butt heads all too often. Improve the linkages between the two teams, treating them as one entity made up of two intertwined partners. Facilitate alignment by redefining roles and responsibilities, sharing all relevant data from lead creation to conversion and establish a universal understanding of all stages involved in the pricing process.
- Technology – Though adapting to social media and mobile marketing may seem like a no-brainer, it’s critical to develop more comprehensive integrated marketing campaigns. Though your team may already be tech savvy, your organization must project this image at all times. The fairness of your pricing may be assessed by how well you market through all applicable channels.
- Value Pricing vs. Value Billing – A cardinal rule of value-based pricing is there should be no surprises. Firms only provide services after price, payment terms, and scope have been prearranged and agreed to by the customer. This creates a better customer experience, with fewer write-downs and write-offs. Calculate a value model or a collection of value drivers that shows how a customer derives value from your solution, and explain it through an all-encompassing value proposition. Hourly rates are old news. Predetermined pricing projects confidence and experience.
- Sustainable Capabilities – It’s important to ensure the longevity of your value. Build customer loyalty, design customized offerings for clients you’ve come to know, pay attention to minute details, and make use of price bundling to fashion unique service packages. Above all, cultivate the relationships you have with your customers. Don’t wait for them to come to you in need. Keep in mind that the customer always has an alternative.
Handpicked Related Content:
A Few Things to Keep In Mind...
- Value-based pricing is based on the perceived value to the customer rather than the cost of a product or an hourly rate.
- Make sure that your sales and marketing departments are aligned -- partly by ensuring that each member has a clear understanding of the pricing process.
- Make sure that there are no surprises in the final cost -- payment and services are clearly defined before the customer agrees to pay.
- It's important that your value be sustainable, through customer loyalty, customization, and unique features
Value is always in the eye of the beholder. For any buy/sell interaction to take place, both parties must profit from the exchange and ultimately receive more value (from their subjective perspective) than what they are giving up.
It’s your job as a B2B marketer to clarify, manage, and communicate that value proposition, which gives your organization the je-ne-sais-quoi needed to justify your pricing. Transform these 5 barriers into opportunities and you’ll be well on your way!
You May Also Enjoy Reading...
- 15 Simple Small Business PR Strategies That Will Save You Money
- How to Empower Your Small Business PR with Thought Leadership
- How to Nurture B2B Leads with Low-Pressure Emails
- 5 Easy Ways to Get More B2B Sales Leads with B2B PR