Pricing is the only moment of truth in value capture Part 1 – Introduction and examples
This note (parts 1 and 2) suggests learning from real world examples of value pricing for products and services. It is important to realize that they are the outcome of many years of trying and failing and trying again. An approach in 4 major steps is recommended:
Understanding customer needs
Comparing your own offering versus competitors
Embedding value pricing in a value selling journey
How to create fair sharing as a foundation for long term equitable economic benefits for all parties
The process starts with your belief that you (can) create real value for your customers. The challenge is that what you think the value is may not be (fully) correct. So, you need to be a little schizophrenic about this. On the one hand fully convinced and driven that you can bring superior value, but at the same time open and self-critical to want to learn what your customer really needs.
3 ways to approach pricing
The most common pricing approach is to look at existing prices and decide to follow or go a little higher or lower. This is called competitive pricing and is very practical in cases where products/services can be easily compared, and prices are transparent. Also, when prices are very dynamic this is an important logic. Though best known for commodity markets like oil and gas, there are many more products and services where this mechanism is dominant. Of course, there are limits. On the low side if prices fall below variable cost (for example raw material costs) every unit sold creates more losses, not a very good business approach. Many commodity players (oil, petrochemicals, building materials, farmers) are very aware of this and use cost curve analyses to guide their pricing. On the high side, for example in case of a near (or temporary) monopoly or undersupply, prices can go up a lot, but the number of buyers will go down and often regulators start to step in. Think of the big internet companies, pharmaceutical examples, tulips in the 17th century. Deep understanding of demand-supply cur ...