In this article Kedar Gharpure shares key steps to develop value-based pricing.
You have likely read articles about Value-Based Pricing (VBP) – after all, the concept has been around for several decades. However, our review of over 50 VBP articles from the top search results highlight that a) there is very little VBP literature geared towards B2B and b) no single article provides a comprehensive and actionable overview of VBP for B2B.
In this article, we provide a complete overview of VBP, specifically for B2B companies.
First, we would encourage you to take this short quiz
Note down your answers as we would like you to re-take this quiz after you have read the article.
VBP is offering ‘value products’ i.e. cheaper products [True / False?]
VBP makes sense only for truly differentiated products [True / False?]
VBP can be defined only when developing / upgrading products [True / False?]
VBP is less effective when the competition is high [True / False?]
VBP is developed only by the Product and Marketing teams [ True / False?]
Once you have developed VBP you can use it with all your customers [ True / False?]
WHAT is Value-Based Pricing (VBP)?
Value-based pricing is an approach to determine the price of your product based on the value it provides to your customers. A very simple example is from the B2C world – a retailer will sell a bottle of water or a pack of crisps a higher price on the top of a mountain or in a tourist hot-spot, vs. its price in a local supermarket. In this example, the consumer will pay a premium for the convenience of buying the water or the crisps in those locations. We use this example to highlight an important aspect of VBP, that the value you provide to a customer is not just based on the specs and features of your product. After all, it is the same water that is being priced differently.
WHY should you consider VBP?
VBP helps B2B companies to capture and sustain higher margins. This is because VBP helps you to:
- a) Differentiate your product / service – so you are not just competing on price.
- b) Earn a fair share of the value that your product / service provides your customers – so that you can improve your margins. On the other hand, VBP can also help you to manage your cost-to-serve by recalibrating the value that you deliver.
- c) Strengthen customer relationships – so you can improve customer retention and your share of wallet.
WHEN should you develop VBP?
Pricing is a continuous process as you need to adapt to the dynamic nature of your market, competition, and customer’s needs. If your organization has never done VBP, then you can start the VBP exercise at any time for your existing portfolio. Developing and testing VBP typically needs several weeks – so we would recommend starting the VBP process as soon as you can. If you are launching a new or an updated product or service, then you should develop VBP in the product development phase. B2B companies typically have an annual price review process. That process should also include VBP review.
Key points include:
- Why consider VBP
- Where to apply value-based pricing
- How to develop and implement VBP
Read the full article, The 6Ws of Value-based Pricing for B2B, on B2BGrowthConsulting.com.