What Is Value-Based Pricing?
Value-Based Pricing (VBP) means to charge what your customers are willing to pay (WTP). This is a simple concept to understand and probably impossible to implement. Every buyer has a different WTP. Perfect VBP implies we can read each buyer’s mind and charge them that one price exactly equal to their WTP. Using today’s technology, this is still impossible.
A better meaning of VBP is implementing strategies and tactics to price closer to your buyer’s WTP than you are today.
Cost-plus pricing is as far away from VBP as possible. In cost-plus pricing, we set a price based on our costs and our desired margin. This has absolutely nothing to do with WTP.
Many companies are at least a few steps beyond cost-plus pricing. For example, they may capture higher margins on some products than others because that is what the “market will bear.” This is a step toward VBP. What the market will bear is a rough estimate of WTP, and it is usually determined using trial and error. We price too high and people stop buying. Hence, we reduce margin to what the market will bear.
Different margins for different products is a good first step toward VBP. The big disadvantage is everyone who buys any given product pays the same price, yet buyers for that product have very different WTPs. The second, and very powerful step, toward VBP is price segmentation. Figure out how to charge different customers different prices.
Many B2B companies do price segmentation simply by having salespeople negotiate deals. Each deal is at a different price. Ideally though, salespeople have been trained to determine each buyer’s WTP and hold firm on negotiations at that point. Determining and capturing WTP for a buyer is not easy. Salespeople need to be trained on techniques like value conversations and negotiations.
There are many other price segmentation techniques companies can implement to capture more of their buyers’ WTP. One technique is building a product portfolio that allows buyers to self-select to higher or lower priced products. Another is understanding the characteristics of customers and transactions that typically demonstrate a higher WTP, and not discounting as much in those situations.
Don’t panic, you will never implement VBP perfectly. Just take a step closer.
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