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 should be done from the customer’s perspective. This is 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).
Table of contents for this article include:
Value Based Pricing: The Power of Being Value Based If You’re a Cost Plus Business
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.
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. However, I was also free to discover the value of the same piece of art inside my mind and with him as well. In addition, 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 then began his 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 the 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 dead animals. Being told at every step, how to think, feel and react to their surroundings. Maybe Damien Hirst is onto something here after all.
Explore my views
So, I didn’t explore my views with my dad as I would have done in the past. Never have I 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 Value-Based Pricing?
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 about 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
The Tate modern
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…”
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 is a real loss. A loss for you, your team, your peers, your customers, and business. When it comes 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).
Asking more questions
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 defence 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).
Read about the best sales techniques in selling value effectively
The advantages of a value-based pricing b2b strategy
This is a strategy, approach, and tool kit all in one. Thus, 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 humans. Humans 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. It 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 customer’s 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, 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. In addition, 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 discovery 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 about how you hire and select people to do this and how you resource your organisation to get your business through some tough times ahead.
Value Pricing: Articulating Value, Not Price and Why It Is Vital
“At the end of the day, it comes down to price”. I heard this today from a marketing manager (not a pricing professional) in an electrical supplies company.
I told him to pack his bags (jokingly) as he had just admitted that his job was nonsensical. If it was just price all our adverts would be big billboards at $19.99 etc. written on them.
Value pricing – what is the service worth to the customer?
It is all about price – but only when the product and service on offer are exactly equivalent i.e. when a perfect commodity exists at a precise equal quantity and in a precise place and state. In that non- existent instance – the lowest price option would win the deal. Of course, even this super, simplified example ignores instances such as seller reputation, counter-party risk, payment terms, account management, service guarantees, money back offers etc.
Articulating the value (value pricing) begins by understanding this and actually explaining it to people both inside (sometimes more difficult) and outside your company.
We’ll try to compare value pricing comes to low-cost pricing strategy. How these different approaches can affect product pricing.
Low-Cost Pricing Strategy: Why Free Services Can Be A Bad Idea
Have you ever tried to teach or mentor someone and found them to be disinterested and not engaged in the process? This can be a very frustrating process for the teacher or mentor as their work becomes fruitless. It can also negatively impact on remuneration. For example, if your remuneration is performance-related, bonuses, etc. may be payable if your client is successful or passes some hurdle. Also, having a record of achieving positive success with clients is very important for futures sales. This can be the case in businesses from personal trainers to career coaches or of course, pricing consultants.
The US-based marketing expert Joe Polish has a saying ” if you do not pay, you do not pay attention” meaning that if there is no monetary exchange for value or information transferred, then people tend to undervalue it. I ask you to think back to when clients did not pay attention – were they paying you a sum that would be regarded as considerable or not pocket change?
Differences between Value and Low-cost pricing
Low-cost pricing can be established by larger competitors, with lower operating costs, to out-compete a small or new business on price alone. More established competitors could force you to take further price reductions that reduce your profits in trying to compete with your larger competitor’s low ball pricing to force you out of the market. Your pricing strategy can ultimately determine your business fate in a small business. By managing your pricing strategy, small business owners can extend business longevity and produce healthy profits.
With value-based pricing, a company considers the value of its product or service, as against to the cost the company made to create and produce it. To do this, the company determines how much money or value its product or service will generate for the customer. This value could originate from factors such as increased efficiency, happiness or stability.
Potential implications of a low-cost pricing strategy for consultants
This insight carries a number of important insights for anyone involved in consultancy or any pricing environment as regards low-cost pricing strategy decisions:
- Charging too low a price can attract too many customers. Evidence shows that even charging a nominal fee greatly reduces people using free services. For example, they put very little financial value on the service that they are unwilling to pay even for a nominal fee.
Note: in this context, arranging payment can be difficult and put people off also. Hence, Amazon invented the one-click shopping approach as a way to increase sales.
- Charging too low make people undervalue your product or service. This argument used in favour of some forms of vouchers to give people “free” schooling. Thus, they believe (particularly in the USA) that putting a monetary value on the schooling children and families receive will greatly increase their focus and attention. Interestingly, there is a counter-argument to this one in US University courses, despite huge fees, only 18% of students graduate within 4 years.
- You may attract the wrong kind of customer. As a consultant or advisor – if you provide advice for a low cost, you may attract customers who do not “invest” enough financially, to also invest mentally – i.e. you can bring a horse to the water but you cannot make it drink. As we have covered in our blogs on psychological pricing and luxury pricing strategy, sometimes a high relative price tag can make people place more value on the service being offered.
Comparing the value pricing and low-cost pricing strategy, both created to attract the costumers in buying their products.
The disadvantage of low-cost pricing undervalues your products. Whereas, value pricing focused on how much the customer values a product is a totally different customer-focused approach to pricing.
In short, low-cost strategy can attract the wrong kind of customers who wants free service or product. Whereas, value-based pricing, you can find customers willing to pay additional price premiums because they believe your product or service will fix an immediate need.
In running a business, there is a huge difference between cheap and free. Hence, very few companies have built profitable or sustainable businesses with solid financial performance by always offering free services.
The low-cost pricing strategy is no longer viable and current with today’s market. More retailers should instead switch to value pricing.
More retailers are preferring the value pricing strategy as it accurately determines what the customers view as the product’s worth.
A Quick Guide to Value-Based Pricing
Here’s a quick guide to value-based pricing for teams embarking on a price rise, improvement or transformation project. Customer value-based pricing is considered to be the best pricing strategy for both B2B and B2C businesses, at least from a pricer’s point of view. Why?
The fact is, most businesses approach value-based pricing in a way which is not entirely right. This, in many ways, is a great opportunity for learning and development. In our view, the problem still comes down to a vague value-based pricing definition and surface-level understanding.
So, in this article, we will provide you with a quick guide to value-based pricing, including an overview of the problem, some insights, tips and a reading list on value-based pricing.
We strongly believe profitable pricing decisions are based on learning good habits but also unlearning bad habits too. So, let’s start now.
Why is it still so misunderstood? Here’s a quick guide to value-based pricing
We are now in 2020, and value-based pricing definition should by now be a well worn and understood concept to implement, but it is not. There are still a fair few staunch disbelievers out there dismissing value-based logic because they believe pricing should to be cost-based rather than value-based.
These ardent supporters of cost-plus are in both B2B and B2C markets and large and small businesses. What’s more, they strongly believe that using simplistic multipliers on aggregate costs is a more tangible and reliable way to set prices than understanding how customers perceive and value their products.
As a result of these latent assumptions and blindspots, cost-plus is still the dominant method of setting and positioning customer prices for new products and price reviews. Which in turn indicates that most organisational strategies and approaches are the opposite of a value-based pricing definition.
And to be honest, I don’t blame them. Pricing is both an art and a science and it can take a lot of time to master. Again, this is why you need an expert pricing team to help you – or at the very least, a quick guide to value-based pricing and reading list.
So here it is.
Did you know that there are books that just talk about pricing entirely? Books like:
1.Negotiating with Backbone: Eight Sales Strategies to Defend Your Price and Value by Reed K. Holden
2. Confessions of the Pricing Man: How Price Affects Everything by Hermann Simon.
3. The Ultimate Guide To Retail Pricing
4. How to Develop a Powerful Pricing Strategy for Your Business by Peter Hill.
5. Pricing: The Third Business Skill: Principles of Price Management by Ernst-Jan Bouter.
6. The Psychology of Price: How to Use Price to Increase Demand, Profit and Customer Satisfaction by Leigh Caldwell.
7. Brilliant Selling: What the Best Salespeople Know, Do and Say by Tom Bird and Jeremy Cassell.
8. Pricing Strategy: How to Price a Product by Bill McFarlane.
Reading the books (listed above) and this quick guide to value-based pricing will dispel some of the myths surrounding customer value-based pricing. What’s more, learning to understand customer value-based pricing with fresh, untinted lens will help to eliminate the myths of it being a dark art.
A quick guide to value-based pricing basics
Value-based pricing is about figuring out how your customers value your product portfolio – every single product and every single customer group and eventually a customer.
Do your customers understand the benefits of value-based pricing on your products and services?
How would potential customers value your portfolio if only they knew about you?
How much do you think they’d be willing to pay for the stuff you sell them if you knew what and how much they valued them?
Difficult questions I know, but the essence of value-based pricing.
So how do you go about determining a customer’s willingness to pay for your products when you don’t know how they value and perceive your business or portfolio? Simple answer: You can’t. You’ve got to find out and do the research. Ask the right questions and bring your assumptions and insights into a pricing framework which elicits essential criteria and list of customer’s value drivers. And from here, start to rank, sort and prioritise these unique value drivers on an ongoing basis and put economic values behind each.
These criteria may include:
1. Your ability to supply what customers want.
2. Network/convenience – i.e., not going too far to get it.
3. How they came about value-based pricing b2b in the first place.
4. What pressing problem is making them look for your products.
5. How easy it is to buy from you.
6. How well they understand their needs and relate the solution to your offer.
And finally, you also need to be realistic about how competent your teams are at pricing in this way. It takes a complete mindset change to do value-based pricing properly. Not everyone can do value-based pricing – the people that can are probably terrible at cost-plus pricing.
Value-based pricing requires people with a range of skills, capabilities and experiences – from maths, science, statistics, psychology, marketing and financial. They need to be logical but think laterally because essentially they are maximising margin and revenue by charging optimal prices for each customer based on the exact amount they are willing to pay for what they are receiving now. And it looks at the likelihood of customers paying more with additional marketing, better logistics and supply chain infrastructure, product innovation and better technology.
No, it’s not simple but this is why businesses are now hiring expert pricing teams to do the heavy lifting.
Discussion on a quick guide to value-based pricing
Pricing is a vast and fast-evolving discipline. Cost-plus pricing is now a somewhat antiquated and risky approach to driving profitability. There are experts in this domain who have over 20 years of dedicated experience in the topic and are still learning new things every day.
Value-based pricing is a discipline in its own right now. Value is relative and deeply intertwined with the market. An expert pricing team knows this and is constantly learning and tracking the market to inform their pricing decisions and playbook. A set and forget attitude to pricing is risky and antiquated.
The market is always changing, and it is a perennial truth that customers will not always want or like the same stuff. But what is constant is the customer’s pursuit of benefits of value-based pricing when they buy. This does not mean value for money, which is occasionally the reason why we buy. Rather, buying something that solves a problem or meets a real need (financial, emotional, physical or psychological) – this is value, and this is what customers are willing to pay for.
Knowing this, your approach to pricing, value and learning should be adaptive and human too. Rest on your laurels with financial terms and cost-plus pricing knowledge based on what you learned 20 years ago, and face volume and revenue loss and eventually a profit downgrade.
- If you are not sure how to price properly, hire an expert pricing team that knows what they are doing.
- By prioritising the opinions of your customers, you are focusing on the people who will be making the buying decisions rather than just your own internal business needs and metrics.
- It takes time to find the right pricing strategy. You have to be dedicated to discovering your customers’ preferences before you set your prices.
- Pricing is a business-critical marketing decision. It shows what the product is worth, what the business is worth, and especially what the customer is worth.
- Find out how much they are willing to pay for your product. What features they want to see you develop. By doing so, you will be able to not only give customers what they want. But you’ll also be able to attract and retain these customers as well.
- People are different and value things differently. For your business, the important thing is to ask your customers what they would have bought, if not your product or service. Their answers tell you who your toughest competitors are.
Value-Based Pricing Steps: Separating Facts from Myths
With value-based pricing steps, we will dispel some of the myths surrounding value-based pricing. In an earlier article, we gave you a Quick Guide to Value-Based Pricing. Here are the top 5 myths about value-based pricing marketing. Followed by some tips and advice on what you can do to improve your approach to pricing.
» Myth 1: The price that creates the most sales is correct.
Well, that’s not quite right. You have to think about the 3, 6, 9-month impact of each pricing decision you make. You’ve also got to think about how discounts, promotions and price rises impact your price and brand positioning in the market.
The problem with only using a volume pricing strategy and cost-plus logic to set prices is that it drives your prices down, and keeps them low as consumers get used to taking discounts from you and seeing low prices in front of your products.
Pure volume plays are a risky price action in any market because there’s no guarantee that customers will buy more simply because it’s cheap. And what if your costs change? Answer: You’ll probably end up either overcharging customers or underselling yourself. A nightmare for customer price perception and your bottom-line profitability.
Best strategy on value-based pricing steps
So, what is the best strategy to create a maximised margin and revenue in a safe and sustainable way? The correct price will always be the price that is good for you and good for the customer as well. The profit dollars you earn as a result of value-based pricing will keep investing back in the growth of your business.
» Myth 2: Pricing is a financial decision.
Again, you’ve got to look at the bigger picture as value and pricing is more than just a financial modelling exercise.
When you’re calculating the best invoice prices for your items, you don’t want to hike up your prices too much because your spreadsheet says you’ll make more money doing this. No, listening to uncommercial financial models alone will drive your customers to the competitors and leave a sour taste in their mouths about you. But you still have to make money and shouldn’t be shy of this. Oftentimes, making money is the perfect excuse to back out of anything scary in life. But pricing decisions shouldn’t be scary or risky.
For example, if you want to sell high, sell high but know you can do this based on data and evidence. If you want to increase your prices later, do so by enlightening your customers on the value they once valued and have received without delay or fault. There is no shame in reminding your customers that you deserve to get paid for great products and services that they really value. Value is a two-way street.
A Marketing Decision
Pricing is, in fact, a marketing decision. The price you put on something, whether deliberate or not, sends a message to your customers about what the product is worth, what the business is worth, and especially what the customer is worth. The point of pricing is about capturing value and making stable profit margins; not just a short-term spike in sales or revenue.
Research your market for value-based pricing steps
» Myth 3: It’s okay to give random discounts if it gets more customers.
This is the kind of practice that can ruin a business.
Sometimes, a prospective client would come in and say, “Hey, I really want to buy from you, but your prices are too high so I will have to go to X your competitor unless you give me a substantial discount.”
To please the customer or get the sales over the line, many sales teams give in and offer large discounts. Then they say to themselves, “What’s the big deal? We got a new client and the client got a discount. Isn’t that win-win?”
Big mistake. These are the kind of customers that arm-wrestles you for a lower price and don’t make for good long-term clients. Interestingly, they are the people who complain most loudly about minor issues and they try to suck up most of your time by looking for special treatment.
And worst of all, they tell the entire community that you’re a pushover and you don’t really know what your business is worth. Encouraging everyone else to get a discount.
Part of the pricing decisions in value-based pricing steps
» Myth 4. Price erosion is an outside force that you can’t control. Wrong!
Price erosion only occurs when you are forced to lower your price—and thereby, the perceived value of your product—to compete with unauthorised sellers violating theirs and your pricing policy to gain market share quickly.
Price erosion is essentially the consistent loss of product pricing due to you and your competitors making a number of risky price actions over time. Playing the market like life is a zero-sum game doesn’t really work either. In fact, it’s a repeat purchase from valuable customers that really maximises margin.
Penetrating the market with low ball prices is a short term revenue play – and not sticky at all. Customers tend to move on to the next cheap offer. You become yesterday’s news and find yourself viewed as a commodity.
Tips on how to control price in value-based pricing steps
It is you who controls your prices. When you set them too low or don’t build enough value to justify them, you have nobody to blame but yourself.
Dominate your market. Offer the best products or services, compare cost vs value-based pricing, excel on client expectations, and build a customer base that loves to be a part of your ecosystem.
The goal here is not to make the market think your prices are “fair ”. But to make the market feel awkward for not paying you more since you’re already giving them such incredible value.
The only way to get the right prices for your offers is to understand what problems you are good at solving. Hence, becoming the go-to expert in your community for that.
- The correct price will always be one which is good for your business and good for the customer. Do not let speculations dictate your price.
- Giving random discounts will give the impression that you don’t know your market value and consumers. They will always expect a discount.
- Pricing is all about capturing value: It shows what the product is worth; what the business is worth; and especially what the client is worth.
- Remind your customers that you deserve to get paid for products and services that they really value. Hence, value is a two-way street.
- Listening to abstract and often uncommercial financial models alone will drive your customers to the competitors. Therefore, leaving bad feedback about you
- Adhering to the myth that pricing is out of your control is essentially a load of crock. You control what your price should be with the help of the pricing team
- The advantages of value-based pricing will increase the profits and revenue of your business. In effect, following these myths will not bring you revenues.
- The goal to value-based pricing steps is not to make the market think your prices are “fair”. But to make the market feel awkward for not paying you more.
Strandbags Uses Customer Value Pricing Strategy To Make Its Comeback 👜
Can a customer value pricing strategy save Strandbags from the digital disruption? Most retail businesses today are transitioning to the digital world to stay relevant. They consider digital marketing as the next trend in business. However, Strandbags disagree.
Strandbags is one of the largest in the travel luggage and fashion bag business. Founded in Australia in 1927, the retail store has become a hugely successful business, making it a household name across the country. But despite its successes, Strandbags had become acutely aware that its once successful brand strategy is now losing its relevance. It needs to reinvent itself and take it to a younger, global audience. To emphasise, it needs to do this without driving away its existing loyal customer base.
Fighting to hold on
It is currently surviving on a quagmire of discounts, percentages, numbers, stacks of product and ubiquitous discount messaging. This is diminishing the shopping experience and quality impression of its products. With that in mind, the true images of its brand, the genuinely good-quality products, the astonishing breadth, diversity and relevance are losing out to its competitors.
However, with the surge in global luxury retailers, many of them have been able to remain solvent due to the strong demand from Chinese tourists. But the situation is changing with many retailers. Just like Strandbags, they are losing out to online retailers who have good online product ads and pricing offers.
The retail market is changing rapidly. Online shopping is taking over from brick-and-mortar stores. Most especially the retail businesses that are facing insolvency. Retailers are being forced to reduce their physical presence and are cutting stocks to stifle costs and CAPEX. To counter this, a good online customer value pricing strategy is the key to survival for many traditional stores, all the while trying to transition their business to online platforms.
More Display Room
The present strategy of Strandbags is to commit more to its physical stores and to expand more display space. The recent shutting down of other retailers in Australia has actually been a blessing for Strandbags. The real estate leases have become more accessible for the company. In effect, they are able to acquire the store spaces they need. This is in line with the new store footprint strategy and will be able to roll out over the next three to five years. It is their belief it will give them the edge over the online retailers.
Strandbags’ goal is to buck the traditional retail trend in order to remain relevant to the next generation of consumers. With the luggage sector showing annual growth of 5%. They are ceding control of the shopping experience to the shoppers. They listened to their customers’ feedback. As a result, they found out that customers don’t like cluttered stores filled with stock and sale signs.
What customers really want is a clear brand story and value. So, instead of the typical cost-based pricing used in the past, Strandbags is now experimenting with a hybrid everyday customer value pricing strategy. This is a value-based strategy set up to attract their customers (old and new) to see their latest fashionable luggage and bags.
A customer value pricing strategy example includes a painting that is usually priced on its perceived value or when a book on a specialised field is priced high due to its market niche.
Much of the refreshed brand both visually and technologically is from the feedback they’ve received from their customers. The customers are savvy enough to know more about the brand by looking it up on the web. They researched it online even before entering the store. In effect, they are also visualising what they want, when they want it, and how they want it.
To become a digital mecca, the store features handheld checkouts for staff to help customers transact then and there – instead of putting them in a line. Video screens line the walls and showcase the brand to the customers wandering in, while the store itself fulfils e-commerce orders. Thus, this allows customers to interact with Strandbags as long as they please.
The challenge now is for the brick-and-mortar stores to attract the time-poor, bargain-hungry customers to buy more in their store rather than buying from their online competitors. What’s more, they need to distinguish themselves from the online stores, showing off the superior quality and low price of their products.
Product quality and price is a blur to retail customers. No meaning or resonance.
Retailers now want to create a hands-on experience that cannot be recreated online, promoting original offers and services to customers that online retailers cannot provide.
Three customer value pricing strategy to entice customers back to stores
1. Loyalty Programs
This strategy has been around for a long time, but it was revived again due to digital disruption.
Big stores like Strandbags have loyalty program cards that can earn you credits when you go shopping with them, including other in-store benefits like complimentary gift wrapping or special events.
Loyalty programs are not only gaining popularity; they are also becoming more integrated with the supporting brand and shopping experience. It offers consumers a seamless experience across the point of sale, the Internet, phone and mobile channels.
This is a big challenge for retailers in boosting sales while also giving customers something different from the norm.
In perspective, Strandbags’ approach to loyalty is not too shabby. You get a 5-dollar voucher for every 50 dollars that you spend. The problem though is that this is over a half-annual period. I am pretty sure that you are unable to check your progress on their website. This could be an issue due to their specialty — bags, wallets and luggage. So unless you are trying to keep up with the Kardashians on the trendiest handbags and leather goods, you would be hard-pressed to earn sizable vouchers.
2. New Stores
The introduction of a ‘new look’ and bigger space has been well received by their customers. The change in-store layout has also indicated that people are still eager to shop at their stores, especially when it is something new to the region but established elsewhere.
Novelty is alluring to customers – both in terms of pricing and product – but price complexity and messy stores are not.
As these big name brands continue to expand, the influx of people often goes to other stores in the area. Once Strandbag stores get busier, other stores near them have a chance to get more business, boosting the industry as a whole. But whether or not other retailers are cashing in on this trend is still in question.
Currently, Strandbags has plans to expand — both their product range and in the geographical sense. The lightweight range of luggage bags is set to be released early next year to compete on different levels against other heritage brands.
Plans have also been made to set up shops in cities across Asia, starting in Singapore which would be the ideal entry point to the global market.
3. VIP Events
Whether it is a seasonal launch party, a special sale or an opportunity to debut a producer, VIP discounts and special events are growing in popularity with a range of retailers.
As a VIP customer, you’ll receive special e-news updates with special offers and style tips, thus, taking advantage of the benefits, even during Christmas and every day of the year.
For example, Westfield shopping centres regularly run events and competitions to engage with shoppers. Often working with retailers in promoting different activities. The response to these kinds of events is fairly positive, suggesting it is one of the ways for traditional retailers to get an edge over their online counterparts and giving customers a much more unique experience.
While many people associate online shopping with savings and convenience, traditional retailers can still provide a range of benefits for shoppers. Much of the success stories told by physical stores ties up with the strategies like the four above. Speculating that differences in shopping experience will lead to a balance between stores and screens.
- Using value-based pricing is a better alternative to cost-based pricing. It reminds customers about what they really value when they buy from you.
- People don’t just want stuff, they really want real shopping experiences, too. Even though they don’t realise it yet. It’s a constant reminder to live in the real world. Jerking them out of the lazy, online world they have become accustomed to.
- Strandbags is attracting new foreign buyers, especially the Chinese. It will give them the boost needed to sell their products online for future customers.
- Strandbags is actively expanding its brick-and-mortar presence, using the possible launch of large-scale mega-stores down the line. This is supported by the fact many shoppers still prefer to shop in a physical store rather than going online, but only if the pricing and store experience is right.
- Much of the brands’ revamp – both visually and technologically is centred around giving control of the shopping experience to the customers.
- Strandbags is expanding globally. It should reconsider going online shopping in other territories like China where the habit of online shopping is prevalent.
Check Out This Humorous Value Based Pricing Example!
Value based pricing example: Pricing is not exactly regarded as the funniest business sector – or one that lends itself very well to humorous anecdotes. However, I heard one the other day that I thought was pretty funny and really highlights a great value based pricing example in a real-world setting. One that can be applied to almost any industry – from tradesmen fixing a faulty appliance – to any B2B scenario.
Taylor Wells is a real revolution in helping companies improve their commercial capability and delivering sustainable margin improvements. We help companies plan and scope their future pricing strategy and capabilities and then enable the recruitment and pricing team building required to implement the strategy.
Value based pricing example – Tesla and Ford walk into a bar…
This anecdote has been told many times and has many people supposedly being the protagonists. A version is examined at the excellent website snopes.com:
“Nikola Tesla visited Henry Ford at his factory, which was having some kind of difficulty. Ford asked Tesla if he could help identify the problem area. Tesla walked up to a wall of boilerplate and made a small X in chalk on one of the plates. Ford was thrilled, and told him to send an invoice.”
“The bill arrived, for $10,000. Ford asked for a breakdown. Tesla sent another invoice, indicating a $1 charge for marking the wall with an X, and $9,999 for knowing where to put it.”
The article gives another real world example of this scenario:
“In the 1880s, James MacNeill Whistler, as plaintiff in a libel action, was challenged, “For two days’ labour, you ask two hundred guineas?” “No, I ask it for the experience of a lifetime.” That seems an apt summary of the message of this legend.”
The simple lesson here is the foolishness of following a classic “cost plus” or cost build up method of pricing.
I think it is a lovely simple anecdote and one that makes me smile!
See our blog here on making a business plan – and why pricing should, of course, be a core component!
Customer Value Pricing: Profits Soar With Adaptive Pricing Team
A real-world example of Customer Value Pricing: Profits soar with an adaptive pricing team:
There are many obstacles and margin pressures challenging your business model and pricing capability right now. From commodity items through to high value-add medical technology devices.
- changing buyers
- changing customer preferences and value based buying
- maturing supply chain procurement
- a highly competitive industry
- pricing complexity
- a demand for pricing transparency
- a culture of discounting and lack of customer value pricing
- misalignment on pricing strategy
To explore the deep connections between business model adaption, customer value pricing and growth (individual, team and organisational), I will look at how business model constraints and challenges have changed the role of customer value pricing management in the Australian healthcare industry. I will then move on to discuss a real-world example of a successful healthcare company, Medtronic.
Medtronic is an example of a forward-thinking company that has transformed its business model to a value-based healthcare model. They did it at a time when the healthcare industry is facing many challenges. Even if you are not in the healthcare industry, you can draw a lot of lessons from Medtronic. Importantly, on their progressive response to an era of rising margin pressure in unchartered territories.
The new healthcare problem
Healthcare companies are moving towards new customer value pricing based business models that are focused on the outcomes for patients. They are also in the process of drastically changing their pricing approaches and reimbursement models. Because cost conscious health systems are making cutbacks and demanding value. For many years, healthcare companies have had it relatively easy. They got rewards for medicines, devices and therapies that produce weak benefits or only incremental improvements over existing treatments. However, now in an era of rising pressure on health budgets, the days of 50% margins without even a murmur or complaint from hospitals, health customers and systems is over.
Healthcare companies, like many other B2B businesses in Australia, are now in a rapid state of change to keep up and survive. Constraints on healthcare systems and reimbursement cuts, alongside pressure from the competition and procurement teams are forcing B2B healthcare businesses to rethink outmoded business models and outdated pricing models. In a race to maintain profitability, progressive businesses, like Medtronic, have addressed many of their business model and pricing challenges. They are now leading the way on how they do business and price to maximise revenue, margin and profit in an era of rising pressure and cuts to health budgets.
What Medtronic is doing through customer value pricing
When CEO, Omar Ishrak joined Medtronic in 2011 he immediately focused on transforming the business to a customer value pricing based healthcare model to become a formidable global healthcare provider of disease therapies. From 2011 till the present day, he invested in people and pricing. He invested in a dedicated customer value pricing function with several pricing directors and large teams of talented pricing managers and commercial professionals. He recruited teams of specialists with deep customer value pricing, reimbursement and health economics expertise and trusted his newly-formed teams to design and lead pricing and sales operations, decision making and requirements authority across a number of business units.
Over the past 4 years, Medtronic’s pricing teams have grown considerably. A consistent investment of time, money and resources into expertise, teams and expansion have enabled rapid growth. As a result of a series of business and pricing adaptions, Medtronic’s value proposition now represents a formidable “Integrated Healthcare Franchise”. Their new value-based business and pricing models have opened up large, new growth markets. Consequently, generating double-digit growth even in unstable and challenging times. They continue to grow and expand in new markets because their dedicated pricing and commercial teams are working closely and more effectively with physicians, hospital administrators and payers than ever before. Unlike a number of their competitors, they have the capability to validate the value that their business has generated from optimal long-term management of patients, including clinical and financial outcomes.
What’s the pay-off for changing old habits?
Despite pricing pressure from a number of areas (i.e., healthcare consolidation, increased competition, declining reimbursement rates and product problems, physician advisories, safety alerts), Medtronic continues to experience top-line growth (with revenues over $27B) and business expansion. In January 2015, they announced the acquisition of Covidien (representing 33% of the total business). Now they deliver a competitive value proposition boosting even greater hospital efficiency and an extensive product offering.
Medtronic is not the only business with an adaptive pricing function. There are also a number of other healthcare businesses in Australia making great headway with transforming their business and pricing at the same time. Other healthcare companies such as J&J, Baxter, Biogen, and MSD have all generated substantial EBIT returns (measured in the hundreds of millions) from investments in their pricing capability and people in the last decade.
What do successful businesses have in common?
Successful businesses stay ahead of the competition. The reason is because they recognise that pricing is inextricably connected to their customers and business landscape. None of them have managed pricing (and price adjustments) without thinking about their value and their customers’ perception of their value. And, every one of them has had a leader with a clear vision for growth.
Strong financial results are founded on congruence between an organisation’s business model and pricing capability. Leading companies like Medtronic, J&J and Merck periodically assess how these two factors are affecting strategy (i.e. their customers), structures (price architecture) and operations and teams in the business. A strategic pricing capability is not administrative. It is not about raising prices by 3% or offering discounts to customers to maintain sales volume. A price is the final output of a trusted and well thought through business model and value exchange with customers.
Strategic pricing is founded on a deep understanding of your business challenges and your customers’ wants, needs and financial constraints and objectives. It is also reliant on “Lean” and “Agile” methodology whereby prices are tested, trialled and rolled-out in sprints and bursts to maximise sustainable revenue, margin and profit growth for your business and your customers’ business in a safe and low-risk way. If you want to achieve strong financial results like Medtronic or other successful businesses, you have to think and behave like Medtronic. And overcome the natural tendency to price and do business in the same way you did 5 or even 10 years ago.
If you truly want to know whether your business has the potential to be among the dominant players in your industry, look at your business and your teams objectively and answer honestly to the following questions:
Can your organisation’s business model compete with your competitors’ formidable new business models? Do you have the right pricing strategy in place to drive revenue, margin and profit growth in the short and long term? Does your team have the necessary skills, knowledge and experience to achieve its goals? Is a winner’s attitude prevalent in the business, driving the organisation to improve or transform old habits and beliefs?
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