article | October 29, 2018
Three Reasons Companies Struggle to Execute Value-Based Pricing Strategies
Most companies acknowledge the merits of value-based pricing as an ideal. Why then, do so many companies struggle to execute it in practice?
There are three reasons we frequently encounter:
Back in the early ‘90’s I was fortunate to meet the late Wayne Calloway, the former chairman and CEO of PepsiCo, at a reception. I asked him how he managed to stay current on the changing needs and behaviors of customers across PepsiCo’s many businesses. His answer surprised and delighted me. He said, “Sometimes I throw on some jeans, jump on my Harley, ride to one of our nearby restaurants and just talk to the customers.”
Value-based pricing strategies must lead with customer value, not product value. This requires talking to your customers about how they derive value from your solutions. Insights from these conversations can then inform decisions on product development and enhancement. Yet many companies find it difficult to shake the “if you build it, they will come” mindset. While a product’s features may indeed have high inherent value, this doesn’t always translate into high customer perceived value.
This is particularly the case for new product innovations. In the IoT space, some remarkable innovations are still far ahead of the customer’s perceived value and readiness to buy. One recent client developed a cloud-based solution to help police forces manage, store, analyze and share their digital evidence. As part of our customer research we interviewed police forces to identify their needs and value drivers. We were surprised to find that the most innovative features–such as predictive analytics to identify future hotspots for crime–were too advanced for customers to perceive value from them. Changing the customers’ perception will require time and effective communications messages.
Creating a value-based pricing strategy without enabling value-based selling in the field does not work. Yet this is precisely what many companies try to do.
When pricing strategies fail to produce the desired results, CEOs often turn to their sales leaders and ask, ‘Why can’t we get our reps to negotiate on value instead of price?’ The reason is that they are not speaking to Sales in the language they understand.
Most sales reps view value-based pricing as just a fancy way of saying “raise prices”. They will balk at the prospect of having to negotiate a higher price and potentially lose the deal. So, it’s critical to connect the strategy to what the sales team does care about.
One former client initially struggled to incent sales reps in key regions to adopt a new pricing initiative. They turned this around by interviewing several sales reps to ask what challenges they were facing in their regions. In one region, most sales were to replace equipment for existing customers. Reps found it difficult to negotiate higher prices for the new equipment, particularly given the presence of aggressive competitors who were willing to “buy” the deal away from the incumbent. With our help, the client deployed new sales training that provided reps with tactical guidance on how to negotiate on value in this situation. The training included real examples from peers who had used the techniques to win price increases even when challenged by aggressive competitors. The reps became more interested in the training once the conversation changed from ‘How to increase prices’ to ‘How to negotiate to win in your most challenging sales scenarios’.
Coaching Sales to negotiate on value instead of price requires contextualizing the conversation around the topics they care about.
It can be difficult to change the status quo; it is familiar and comfortable. Inertia explains why some organizations continue to price through elaborate cost-plus excel models even while acknowledging the merits of value-based pricing in theory. When a company can calculate its costs to serve a customer down to the penny, it is tempting to assume that cost-plus pricing is a more “precise” approach, making it difficult to switch to the seemingly vague promises of pricing based on estimated customer value. Also, let’s not forget the heroic efforts made by the Pricing or Finance team to create these complex models.
Status quo can be a hard habit to break, and effectively implementing a value-based pricing strategy is challenging. However, the rewards truly make the effort worthwhile.
Value-based pricing is attainable, but successfully implementing it in your company requires you to do several things right:
Download the Strategic Pricing Framework Guide to discover how top companies think about their pricing, evaluate the proper way to think about your own pricing strategy, and leverage different pricing strategies, structures, levels, and executions.
Are you wondering if you have the right pricing strategy to support your revenue growth goals? Take the Revenue Growth Diagnostic to rate your Pricing Strategy against pricing emerging best practices of top companies to find out if your revenue goal is realistic. If you need advice or encouragement on this journey, please reach out. We’re here to help.
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