Do you value “price to value?” Better yet, do you even know the value of your Value Proposition?
Price to Value Components
- Cost based: setting a nominal price above your total product costs to ensure a designated margin or profit
- Competition based: pricing in sync with what your competition offers to remove price as a differentiator
- Value pricing: charging the customer based on what you and the customer agree to be the worth of the product
Pricing to value should be the goal of every business. Although this makes sense to most business leaders, the problem is that many leaders have problems identifying the value of their value proposition. Not knowing the value proposition could explain many business leaders’ strategy of pricing to cost. Furthermore, some don’t equate a value proposition with their offering. In that situation, it is clearly understandable that their pricing is relegated to a competitive basis.
Successful Price to Value
To successfully price a new offering or optimize your prices for existing offerings, you need to both understand and measure value created (value propositions); translate value created into an ‘easy to understand and communicate’ offering; and then capture a fair share of the value through value pricing.
Determining the value of your offering generally requires you to conduct a quantitative Pricing Study and depending on the nature of your business, two common approaches exist, Choice Price Modeling, or Concept Price Testing. These two approaches are well documented in the literature. Choice pricing is often applied in a competitive assessment and Concept pricing in a new product investigation.
Operationalize the value pricing concept, by internalizing the 3C’s (Create value – Communicate value – Capture value) into the thinking and behavior of the entire marketing and selling organization.
About the Author
Ron Sullivan is a Senior Partner at Breakthrough Marketing Technology. He has worked with many businesses on innovation, new product development processes, strategy, building new business models, channels and distribution, and pricing optimization. He has significant expertise in study design, data analysis, and market intelligence.