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Value Pricing Changes the Rules of the Game | Simon Kucher & Partners

Value pricing is gaining recognition as the superior pricing strategy for both new and existing offers. Companies understand the importance of moving away from the cost-plus pricing approach and aim to set prices that customers are willing to pay based on how they perceive value. However, many struggle to overcome the obstacles that developing and implementing a value-based strategy entails. This is part 4 of our #PricingBasics series.

A well-known example of successful value pricing is the IPhone. Apple users willing to pay more for their device compared to similar products on the market. Be it the luxury shopping experience in stores or the feeling of belonging to the Apple “community”, the higher price tag can be justified by the benefits customers receive from buying and owning the product, without focusing too much on the actual production costs.

As pricing experts, we often hear “But we’re a commodity, we can’t sell on value!” True, not everyone can be the IPhone. These kind of products don’t come around every day – or even every decade. But being a commodity doesn’t mean you cannot succeed with a value-based pricing approach. When value-based strategies fail, the problem is likely not with the product, but actually with how you define and execute value pricing. If a value pricing strategy isn’t working, then it probably isn’t as value-based as you think.

What is value pricing?
Ask each of your departments individually and they will probably tell you they are focused on value. R&D strive to create a valuable product and aim at reaching the most advanced performance levels, Quality Assurance maintain the value, Marketing think about how to package it, etc. But do each of these departments know what the customer truly values? And where are the efforts to monetize the added value that the product, service, or solution provides?

True value pricing needs to be the golden thread within your company that unites every department and function. All efforts need to be aligned to focus on how to identify, create, and monetize value – this often involves a drastic mindset change that extends far beyond price alone. Here are four key steps that companies need to follow for a successful value pricing approach.

1. Map the key value drivers
First you need to thoroughly understand your competitive environment and identify where you create value. Are there direct competitors, or does competition stem from alternative solutions? Are you faster, more efficient, reliable? Do you provide better conditions? Start by asking your customers (and also all your internal departments interacting with your customers). Rather than just a quick phone call, really dig deep into the detail and conduct extensive customer interviews to understand their business and processes – and your product’s involvement in these processes. Target the different steps along the value chain and identify where you differ from the competition. In a complex value chain, you might even create value for your customers’ customers.

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Value Pricing Changes the Rules of the Game.

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