No company implements value based pricing uniformly across their business. It just does not happen. Cost based and market-based pricing for many offerings is simply faster and easier. To use the old hand grenade analogy, those may be close enough.
For example, IT firms have routinely priced Professional Services with a cost-plus model. Over the last 10 years, according to the TSIA Market Rates Study, the percentage of tech firms that do that has only moderately shrunk from 80% to 70%. In part that is because many technology professional services are standard implementation and integration projects, often doable by any number of companies, including channel partners. The rates or prices for this kind of work naturally migrates to cost plus or market based pricing.
Value Based Pricing
If you are going to move toward value based pricing, then you need to pick your spots. I am going to suggest 3 criteria for making those choices:
- Meaningful Differentiation – Is your offering different from the competition in a way that significantly impacts the customer’s business model. In other words, is your offering different enough that buyers notice and are willing to pay for? Innovative new products or services are a great place to start.
- Marketing Strategy – Value based pricing is at the heart of good marketing strategy (See graphic below). For value-based pricing to be effective, you need a well-defined target market and value prop. Your offering needs to deliver on that value prop and you need the ability to prove your value differentiation.
- 3. Sales Capabilities and Tools – For us pricing nerds, having a great value-based pricing strategy is akin to a spiritual revelation. Truth is, though, customers must be forced to acknowledge and pay for value. The job of sales and SME teams working with sales to execute the strategy. They need tools and capabilities that permit them to provide customers with value for price trade offs, and during negotiations to make those trade offs while maintaining company margins. Do you have a sales team that can execute a value-based pricing strategy?
If you have these three, then you have a significant pricing opportunity. It is not unusual for companies in this situation to capture 20% or more in price premium while maintaining growth.