Value Based Pricing: The Power of Being Value Based If You’re a Cost Plus Business
I wanted to start today by sharing a personal story about the power of value-based pricing. This is based on an experience I had as a customer, not a practitioner or expert. I think understanding what a value-based pricing strategy is should be done from the customers perspective. To give you a deeper sense of how customers experience or deal with your cost-based pricing strategy (or even the lack of a value-based pricing model).
When I was twenty-one years old…
I went to the Tate Modern in London with my dad for the first time. It was 2000 and the very first year the gallery had opened the building to the public. It was also the first time I understood the value of valued based pricing. My dad and I had talked for many weeks before our visit to all the wonderful pieces of art we would see there. We were also aware of the high price of entry for private exhibitions. But we were still prepared to go.
Because for my dad and I, art, books, and films were our primary activity in London together. Art helped us explore and challenge what we valued and why (as opposed to what we thought we valued). I had my dad right beside me explaining why he valued a certain piece of art, but I was also free to discover the value of the same piece of art inside my mind and with him as well. And I had this idea that the Tate modern was going to be the best place to test our assumptions and share our views.
I had a vision in my head of people wandering through the rooms and debating great art. Sharing their knowledge, opinions, views, and feelings…
What I found, though, was that Tate modern was more like an abattoir without the rib eye steak. The very first moment we got there I noticed the stone-cold silence. No one was talking or sharing views or ideas. We went to the counter to buy tickets for a Damien Hirst exhibition. An extremely gaunt, Avant Garde staff member gave us our tickets with a very serious expression. He set spiel on how Damien Hirst’s ‘Cow’ was the spirit of Tate Modern.
This made me wonder, how can dead animals (including a shark, a sheep as well as the cow) hanging, preserved and suspended —and sometimes dissected in a tank full of formaldehyde – capture the value of Tate Modern. By any standard, the Hirst exhibition pales in comparison to the space in which the cow floated (the old OXO building – a landmark in London).
I turned to my dad and said if that’s all the value they can offer us, we should skip the exhibition and just walk around the building. We didn’t do that though; we paid nearly 40 dollars each to see Damien Hurst’s Cow exhibition, and zero dollars to explore the building.
As I was walking around the exhibition, looking at all the dead animals floating in harsh chemicals, I couldn’t figure out for the life of me why we were supposed to be so impressed by this? What the value of it was, or why the ticket price was so much money?
I walked around the room in silence; feeling slightly queasy along with everybody else.
I did my best. I tried very hard to appreciate the ‘Cow’ as a valuable piece of art. But, I couldn’t see it. I just walked around the exhibition in a dissociative state. Waiting for the time that we could get out of the room and walk freely around the rest of the building in peace.
I did try to share my views with my dad as we walked around the abattoir – I mean gallery. But the first time I said something to him, an arty looking person overheard and glared at me with contempt, like “What do you know about art you philistine?” And then the second time I tried, I read a sign beneath the dead Cow’s head – on its tank – explaining that the true value of Damien Hirst was his ability to capture the spirit of our age. I looked up at the cow and back at the sign. Up at the cow and then around the room. Did this dead cow capture the spirit of our age?
Not to me, it didn’t. I thought this gallery is firmly set on telling me I’m wrong, and that their view on value was the definitive view. I suspected bashing my views and destabilising my value system was their way of making more money. They had a captive audience of uninformed visitors willing to pay a lot of money for something they didn’t even like or understand. Visitors were pretty much paying to be herded around like cattle in a relatively small room filled with a dead animal; being told, at every step, how to think, feel and react to their surroundings. Maybe Damien Hirst is onto something here after all…
And so, I didn’t explore my views with my dad as I would have done in the past; and I have never shared these thoughts with anyone until now. I sort of suppressed my true thoughts and reactions. I think I only returned to the gallery again once after that too. The second time was the same, but this time I skipped the exhibitions and just walked around the building for free.
I felt kind of guilty about stifling my views too. At the time, I felt as if my views were not important and not valued. I was angry with the gallery for silencing me and making me self-conscious. The whole experience seemed like a framing and anchoring exercise. Positioning the gallery as a font of all knowledge and visitors as ignorant. I thought it was very clever of Saatchi to use a magnificent building with lots of rich history and cultural significance to frame worthless pieces of art and then later sell them for millions of dollars to private collectors.
Why explain this?
I tell you this story about the Tate modern. I could have told you fifty business stories very similar to it. Executives bewildered about why their customers were asking for price reductions? Or even prepared to bear the switching costs to an alternative supplier when they, in their minds, were the top incumbent. At the same time, the same executives could not explain the value of their offer to their customers. Or why their customers were so unhappy to find out that someone else was charging substantially less for the same thing.
Sounds a bit like the Tate modern story again, a business:
- Telling customers they have no right to complain when they were getting a poor service
- That doesn’t care what their customers’ value
- That thinks incumbency is a safety net for everything
- Overcharges and under-delivers with a bad attitude to boot
- That doesn’t even realise that it’s their job to be trying to give customers a great experience
But like the Tate modern, it is easier to shut down any dialogue with customers and expect them to cough up the money. Even when they’ve had a terrible experience with you! I suppose, when you shut out customers, you don’t have to face feedback like “your offer is of limited value, I want my money back or a discount to compensate for what you’ve just put me through…”
And, really, it’s not just a shame when price discussions turn into a verbal bashing about how useless and no good your business is. It actually a real loss. A loss for you, your team, your peers, your customers, and business. When it comes time to re-evaluating pricing, we need leaders and innovators challenging the status quo and proactively trying to understand customer viewpoints, pain- points and problems (even if it is a bit difficult to stomach sometimes).
We need managers not just offering discounts at the first sign of trouble. We need more people asking questions to uncover how we can help customers: achieve their financial goals, make their lives easier and fix their problems.
This includes listening to staff and customer feedback and doing something about it. Not believing incumbency is enough – because it’s not. And it is building world-class teams with the right mix of skills, styles, and capabilities. They drive a value-based pricing strategy in a tough market and business culture of staunch cost plus values and beliefs.
To overcome the emotional bias for the status quo in your business, you need to understand what value-based pricing is. So, what’s the difference between cost-based pricing and value-based pricing? Cost-based pricing strategies and methods try to control customers and the market by simply denying that they exist.
Businesses that use cost-based pricing vs. value-based pricing tend to do overly complex cost allocation analysis. There’s an overly simplistic mark up to finish off to set unrealistic margin targets. They also seem to believe that it’s okay to have their sales teams bashed daily by procurement. They sit through the painful process of procurement, unpicking their finance or marketing team’s irrational cost plus logic line item by line item, with absolutely no defense or position.
So, what is a value-based pricing definition, then? Value-based pricing b2b is more than light and airy marketing surveys or jargon. It’s a way to empower your sales teams and your customers to have a meaningful and relevant discussion about the value of the commercial exchange (not just the invoice price).
The advantages of a value-based pricing b2b strategy
This is a strategy, approach, and tool kit all in one. Helping salespeople defend themselves against a procurement team only interested in lowering their costs.
Value-based pricing b2b is a way sales teams can get the full price by helping explain to customers the economic value of the offer in simple terms.
Consumer value-based pricing is also critical and applicable to B2C businesses under margin pressure too. Why? Because consumers are human’s and human’s don’t understand absolute value. Value needs to be explained in relative terms for us to understand it. Not shoved down throats using a cookie cutter approach.
I find that B2C businesses that haven’t done a good job understanding what consumers value offer blanket promos and excessive discounts, hoping this will drive volume. Often it doesn’t. Because consumers don’t appreciate discounts on things, they weren’t going to buy anyway.
It’s your responsibility, as a leader, to help your teams educate your customers on the value they are receiving. This means clearly showing customers the trade-offs they’ll have to make if all they want is a rock bottom price – this is true for consumer value pricing and value-based pricing b2b.
Help your sales teams and customers understand the opportunity costs and risks of not using your products and services. Value-based pricing focuses on the gains they would get using your product versus the competitors.
Often, even saying this, puts executives off. Or, leads them to water down value-based pricing with their hunches, rules of thumb and assumptions about customers. Value-based pricing is an equal mix of customer psychology, economics, strategy, data analysis, promos and incentives, and mathematical modelling. Many choose to leave out the parts with which they don’t feel comfortable or competent (often the customers part). Doing this, however, will lead you straight back to the beginning. Unexplained value, angry customers, volume loss, revenue loss, tired and stressed out sales teams, segmentation models that don’t make sense or limited yield insights about customers – need I go on?
To sum it up then, I think what I’m saying is we need more of a balance in business. We need people in the business to count and protect our money for sure. But, we also need people in the business that can make money and find new growth opportunities. Yes, I know you have sales and finance teams already, but sales teams are busy selling and finance teams are P & L experts with a limited view on the market.
Your teams need help to drive profitable revenue growth. They need the support of a world-class pricing team to help them. A team dedicated to helping them make more profitable sales and deals. And you need a world-class pricing team on board. They help optimise prices across your products and customer segments. They drive consistent and safe EBIT gains in highly competitive and disrupted markets.
If you really want to improve your pricing in the best way possible, then, you need a diversity of thinking and people who know what they are doing when it comes to value discover and strategic price setting and strategy.
Improving pricing is a process, not an event. Not everyone who puts their hand up to do pricing can do it, often they are the worst option.
You now need to be careful now how you hire and select people to do this and how you resource your organisation to get your business through some tough times ahead.