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.