Pricing Experts

Why Pricing is so IMPORTANT?

While too many companies are focussing on market share, the real deal is focusing on profits, on margins! Market share is not the Saint Grail.

There is One Good Pricing Purpose: Increase Profits!

Pricing is the single most powerful lever an organization has for increasing profitability. But most companies devote much more time and effort to cost-cutting than to pricing. Do you know that if the average company increases the prices by only 1% - without any change in volume and costs - profit could climb over 10%?

Pricing is an area of low knowledge and high opportunity for most businesses. If you want to take action, how do you get started? First, by cleaning up discounts with existing customers offers the greatest potential for most businesses. Eliminating unnecessary discounting can improve margins by over 20%!

Three main things undermine pricing effectiveness:

  • It is not the best customers who get the best price; it is the best negotiators.
  • Most salespeople negotiate price more aggressively internally than they do externally.
  • Companies are not sure of the rationale behind prices because they tend to drift over time.

More than half of businesses use cost-based pricing. Their focus is on what their costs are and then adding on a margin they consider acceptable. Few other price their products or services based on competition, market or based on historic data.

The best way to price your products or services is called value-based pricing, which is pricing from the perspective of the customer. 

Value based pricing (VBP) - Value based pricing is a business strategy.

  • It sets selling prices primarily, but not exclusively, on the perceived value to the customer, rather than on the actual cost of the product, the market price, competitors prices, or the historical price.
  • The most common mistake in pricing involves setting prices by marking up costs ("I need a 30% margin"). While easy to implement, these cost-plus prices bear no relation to the amount that consumers are willing to pay. As a result, profits are left on the table.
  • Value-based pricing is dependent upon an understanding of how customers measure value, through careful evaluation of customer operations. Survey methods are sometimes used to determine the value, and therefore the willingness to pay, a customer attributes to a product or a service.
  • The goal of value-based pricing is to better align price with value delivered. Price for any individual customer can be customized to reflect the specific value delivered.
  • Value based pricing is intended to make companies become more competitive and more profitable than using simpler pricing methods.
  • It can also be used in product development and product management to configure products to maximize value for specific customers.

Value Based Pricing is based on the Economic Value Estimation – EVE

    In EVE, it’s recognized that each customer differs in how much value they can get from a solution and by identifying the buyers alternatives. Buyers always have alternatives, and the price of alternatives is set by the market.

    But the alternatives are generally not identical. Each will have advantages and disadvantages for a specific customer and it is these differences that create differentiation, and with differentiation comes opportunity.

    Value modeling using EVE helps marketing and sales understand what is commodity and what is differentiation and to focus on the latter.

    By helping the sales people understand the three or four key areas of differentiation over their competitors, companies are able to capture value beyond the commodity market