People often think that value-based pricing (or I would rather say – customer-based pricing) is very difficult and can apply to very technical and breakthrough products or solutions. Is it really so?
Let me then ask you – what is the price for shall bottom of…..mineral water? Can there be anything more “basic”? Well, it is not that simple as you can think. How much are you prepared to pay for the exact same bottle of mineral water in a supermarket, convenience store, gas station, vending machine, or restaurant? Yes, you know this well – the price difference between those points of experience could be several dollars per bottle. There is a reason for that – the price depends on the customer’s specific pain points. And the baseline for this: you need to segment your customers in order to understand them well (please read one of my earlier posts, which refers to the importance of segmentation).
Value/ customer-based pricing can apply to any product or service in virtually any industry! And it is not that difficult either!
But keep it simple and as practical as you can!
Here are several recommendations as how to get started and put customer-based pricing into real life:
- Focus on single segment
Start with one segment. Identify buying personas and try to understand the best you can their unique, specific pain points.
If you operate in multiple segments – then you have to define your price per each segment. This is not a one size fits all exercise!
2. Compare with next best alternative
Your customers have freedom of choice. You need to understand what they would do if your product or service is not available. Where would they go to? What alternative product and from what vendor would they likely buy? Or perhaps they won’t buy anything at all, changing their processes instead? You are not alone in the marketplace – understand available alternatives and the competitive landscape.
3. Understand your unique feature
Products and services available to customers in the marketplace could be very complex and sophisticated. The good (though very challenging if you’re serious about it) thing is that you don’t need to look at every single feature your product or service has. You need to identify the unique one, which clearly and understandably differentiate you from the next best available alternative. You need to find “just” this one, which makes the difference for your customers.
4. Give a price tag to your unique feature
Yes, this step is inevitable and yes, you can make some mistakes. But don’t think that the longer you analyze, slice and dice your data you will get a better result. Do combine different research methods to validate your hypothesis. Try on one side to play with e.g. conjoint analysis (but don’t necessarily look at your historical data; try to set you free from your history and legacy) and run extensive customer focus groups interviewing. You would be surprised what valuable input and insights you will get from them.
5. Be flexible
As I said above – you won’t be perfect. Be ready that some customers will most likely come back to you to negotiate. Make sure you don’t forget about this when updating your selling process or setting up your CPQ.
6. Enable your sales force
Your product or service won’t sell by itself. Once you have selected your segments, understand your customer’s pain points, identified your key differentiator, and put your dollar value to the one, fixed your CRM and CPQ – address your own sales force and your channel partners. You need to have appropriate sales enablement in place, sometimes you need to change few salespeople or replace some of your business partners, and please don’t forget about supporting your efforts with motivation systems that will help you to reach your goals.
Companies try strategies to harness subscription sales as recurring revenue is a fantastic direction to take in order to produce long-term sustainable and profitable growth. However, many companies struggle as they failed with their customer-based pricing. Customer-based pricing is paramount to scale! Don’t be afraid, it is simpler than you think! Good luck!