When your product manager tells you the price you that should expect for your new product, how do you know if it’s a value-based price?
What about when an account manager asks for pricing approval to close an important deal? Is the price he’s showing you a value-based price?
You know your pricing should be value-based whether it’s for an overall product line or an individual deal. But how can you be sure that it is. If only there were a simple tool that you could use to test your pricing.
The Pricing Tool
The value-based pricing model below is about to become one of the most useful tools in your value-based strategy toolbox. In this model:
- The height of the box labeled “Reference Competitor” refers to the price of your customer’s next best alternative to your solution.
- The height of the “Your Added Value” box, represents the value your solution produces for the customer in excess of the reference value.
- The total height of the “Reference Competitor” and “Your Added Value” boxes represent the price of your solution at full market value.
- Price axis represents the range of all possible prices you could set for your product.
When to Use It
To ensure that you are pursuing value-based pricing, you need to use this tool at every stage of value-pricing formulation. This includes:
- Product Roadmaps
- Market Requirements Documents (MRD)
- New Product Development plans
- New Product Market Introductions
- Sales proposals
Every product on your roadmap needs to a target customer value and the pricing associated with it. Your long-term revenue depends on it. The MRD needs to describe a business case and a product that will satisfy it. No product’s business case is complete without a price. Should you invest in that new product development? You’ll need a price assumption for the product development plan’s ROI calculation. When it comes time to introduce your new product to the market, it’ll need a price to anchor your value proposition. And lastly, individual deal approvals require you to answer price question nearly every day.
This one simple tool will help you determine if your pricing is value-based in all of these.
How to Use It.
OK here’s what you do. Anytime you are presented with a price, have the presenter (usually a product manager or a sales person):
- Name the market reference,
- Articulate assumptions for the reference’s value and pricing and the justification for those assumptions,
- Quantify your added value versus the reference and the rationale for it,
- Indicate where on the price axis of the value-pricing model the proposed price exists, and
- Explain why the recommended price is the highest price you can charge relative to the reference that will allow the company to reach its market share objectives.
By having a conversation around built around completing these five steps, you’ll be able to calibrate whether your pricing is value-based or not.
Suppose in a sales situation a prospect has told you that your incumbent competitor has offered to sell him a piece of equipment similar to yours for $2M. You know that your system produces $1M more value for the customer than your competitor’s $2M system. That puts the full market value of your system at $3M. You’re recommending that your company propose $2.7M. The justification is that the prospect will incur switching costs and will need about a 10% value incentive to make the change and adopt your equipment. The value-pricing model below shows this scenario.
An organization using this tool would then challenge the assumptions that went into this model to assure themselves that their pricing is value-based.