Ask the Expert – Episode 1 – How do you know you are practicing Value Based Pricing?

This is the first in the new pricing series I wrote about last week. In this article, Reed Holden, renowned pricing expert and author of two pricing books, answers one of the three key pricing questions I posed him. Mr.Holden asks the product managers to do their homework, on their market, customer preferences, how to sell and most importantly ask and answer the question: “How the customer makes money?”

What is one visible and tangible task a business practicing value-based pricing will do that others don’t do?
Understand, in depth, the value of the product or service to the customer relative to good competitors.  That value should be based on the specific financial benefit to the customer organization and include cost reductions, increased efficiencies and improved sales and profitability.  It should be based on a solid understanding of the customer business model and how the product and services impacts that model.


[My annotation] Understanding the customer business model is so elementary yet most ignore in practice. It is important to know this not only when you first start selling but also essential to be tuned to its evolution. For one thing a customer with failing business model may not buy anymore from you and the other a changed business model may make your offering irrelevant.  A business focused on its own cost for its pricing is clearly focused on its own business model rather than its customers.

If you do not know how your customers make money, you are not practicing value based pricing.

Other readings:

  1. Treating different customers differently
  2. Pricing Strategy is all about the segment

5 thoughts on “Ask the Expert – Episode 1 – How do you know you are practicing Value Based Pricing?

  1. David
    Thanks for the detailed reply.
    You are correct that this was a short article because it was exploring just one aspect – “What is one visible and tangible task a business practicing value-based pricing will do that others don’t do?”

    I did not mean this to be an exploration of all scenarios.
    There are other articles on my blog that cover in depth about segmentation, value difference across segments and the need for price discrimination.
    For your reference:
    Segmentation articles http://goo.gl/0GPK
    Effective Pricing http://goo.gl/4fDY

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  2. Stephan
    You are correct in stating that this did not answer B2C businesses. Understanding your customer’s business model applies to B2B cases. But for B2C, the question to ask is, “What reasons (rational and emotional) is your customer buying your product for?”
    See here: http://goo.gl/DMfv

    -rags

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  3. I think I like this article, but it leaves a lot of ground unexplored. I would add the following:-

    Not only should product managers do their homework, but sales people too. Indeed there is no point in ‘product management’ embracing value-based pricing if the sales team don’t!

    You (and Dr Holden) are right to say you must understand the value to the customer, that this value must at some point be articulated in tangible monetary terms, and that all the other points mentioned are part of this understanding.

    What you don’t make clear is that value will differ from customer to customer, from circumstance to circumstance, and this is not only a legitimate reason for prices to vary but it is moral and ethical to vary them – certainly for the provision of a service, even if the work done is virtually identical.

    An obvious consequence of this is that the differing value will have to be established in each individual case, during the ‘sales conversation’, which almost certainly involves sales people.

    No salesperson or product manager can tell the customer what value they will derive from their purchase. The customer has to tell themselves this – and they may need help to do so, so this is a key sales skill – and only then can they tell the sales person. The sales person then needs both the skill and the authority to propose a solution, and attach a price to it, that delivers to the customer a huge RoI when they compare price and value.

    Naturally a cursory check on profitability must also be made by the sales person before quoting the price, but only to establish whether the profit will be huge or whether a loss will be made. Anything that is not obviously hugely profitable must be imagined to be loss making. Marginally profitable is not acceptable.

    David Winch
    david@davidwinch.co.uk

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