Pricing on ValueDefending and growing margin

Published August 2010 Updated August 2011 11 lectures
Mr. Harry Macdivitt
Director, Axia Value Solutions Ltd, UK

In the pursuit of greater profitability, managers have a number of choices. Ultimately these boil down to unit price increases and unit cost reductions. While there is much evidence that even a small price increase can improve profitability per unit by at least as much as a combination of fixed... read moreand variable cost reductions, in reality most managers elect to address cost issues rather than make a price change. Business process re-engineering, supply chain management, enterprise resource planning, six sigma, lean manufacturing, revenue management and off-shore procurement are some of the techniques that have become popular in recent years. Price increases are seen by many managers to be too complicated or too dangerous. Nevertheless, interest in price management is intensifying as companies seek to squeeze more profit out of their products and services.

More often than not, pricing problems emerge because of failure to identify the real value of the products and services offered, to articulate this value to customers and to link the price asked to value. This occurs almost always because vendors focus on technology and products rather than on developing a clear view of their customers’ real needs. This myopia is compounded by a strong preference to ‘build up’ prices on the basis of product cost or by comparing with prices of competitors. Cost based pricing leads to an obsession with cost cutting and price negotiation, diverting effort away from considering and creating customer value. Competition based pricing methods lead to an obsession with competitors’ prices and ‘not rocking the boat’. Although ostensibly logical, rational and fair, neither method captures incremental value and neither method rewards innovation. Both of these can lead to adversarial pricing situations, deep discounting to gain (temporary) market share and ultimately premature commoditization. Cost-based and competition-based methods are widespread in Europe and the US and the vast majority of companies use these methods singly or in combination. A pricing approach based solidly on incremental value to the customer, by contrast, firmly places emphasis on the real value-in-use delivered to the customer. Customer value based pricing can deliver superior business performance, better profits and better customer relationships. The better the product performs, the better the rewards for both buyer and seller.

Today, very few companies use this pricing method.
Customer value based pricing (CVBP) demands a completely different approach from conventional methods. Most importantly, companies successfully implementing CVBP deliberately build value into their products and services at the very beginning of their product innovation processes and ensure that when the product is finally introduced into the market, a very clear and precise value proposition is defined. To do this, a customer value ‘cordon rouge’ needs to run through the company all the way from the board room to the final end-user. This often means re-thinking marketing strategies, product development priorities and selling and account management skill-sets. CVBP cannot be simply retro-fitted into a company’s price list arbitrarily in the hope that better profits will result. The consequences of this could be disastrous! Rather, the introduction of CVBP needs to be carefully planned, like any other major strategic initiative, and the organizations need to be prepared for its introduction.

This series of talks will look carefully at all of the factors involved in implementing a customer value based approach to pricing in conventional industrial and commercial product and service sectors. In addition to providing thorough briefings on the various aspects of CVBP, it will also examine how this approach to pricing works in a selection of different industries. The series as a whole offers a comprehensive understanding of CVBP and will enable the viewer to identify and address many of the process and organizational changes necessary for the effective implementation of a viable CVBP strategy.