Value-Based Pricing: Drive Sales and Boost Your Bottom Line by Creating, Communicating and Capturing Customer Value - Hardcover

MACDIVITT

Hardcover

ISBN 10: 0071761683 ISBN 13: 9780071761680

Publisher: McGraw Hill, 2011

Synopsis

A Groundbreaking Pricing Model for the New Business Landscape

Why would any customer choose Brand X over Brand Y, regardless of price? In a word: Value.

When customers feel they are getting good value from your product or service, they are more than happy to pay more―which is good news for you and your business. Even in today’s global market―with its aggressive competitors, low-cost commodities, savvy consumers, and intangible digital offerings―you can outsell and outperform the rest using Value-Based Pricing. Done correctly, this method of pricing and selling helps you:

• Understand your customers’ wants and needs
• Focus on what makes your company different
• Quantify your differences and build a value-based strategy
• Communicate your value directly to your customers

Now more than ever, it is essential for you to reexamine the reality of the value you offer customers―and this step-by-step program shows you how.

Developed by global consultants Harry Macdivitt and Mike Wilkinson, Value-Based Pricing identifies three basic elements of the Value Triad: revenue gain, cost reduction, and emotional contribution. By delivering these core values to your customers―through marketing, selling, negotiation, and pricing―you can expect an increase in profits, productivity, and consumer goodwill. These are the same value-based strategies used by major companies such as Philips, Alstom, Siemens, and Virgin Mobile. And when it comes to today’s more intangible markets―such as consulting services or digital properties like e-books and music files―these value-based strategies are more important than ever.

So forget about your old pricing methods based on costs and competition. Once you know your own value―and how to communicate it to others―everybody profits.

About this title

About the Author

Harry Macdivitt served as marketing director in a leading electronic controls company, with specific responsibility for strategic management, new product marketing, and development for U.K. and international markets (United States, Russia). He has run training programs for corporations in the United Kingdom, European Community, North America, and China and works regularly with growth-oriented small- and medium-sized businesses.
Mike Wilkinson works worldwide with clients across a diverse range of industries and business sectors focusing on value and value selling. He has worked in a wide range of senior sales positions and has experience of fast-moving consumer goods as well as business-to-business sales.

Excerpt. © Reprinted by permission. All rights reserved.

Value-Based PRICING

Drive Sales and Boost Your Bottom Line by Creating, Communicating, and Capturing Customer Value

By Harry Macdivitt, Mike Wilkinson

The McGraw-Hill Companies, Inc.

Copyright © 2012 The McGraw-Hill Companies, Inc.
All rights reserved.

ISBN: 978-0-07-176168-0

Contents

Acknowledgments
Introduction
Part I Value-Based-Pricing Key Concepts
Chapter 1 What Is Value?
Chapter 2 Mapping Differentiated Value
Chapter 3 Cost-Based Approaches
Chapter 4 Competition-Based Approaches
Chapter 5 Measuring the Triad
Part II Value-Based-Pricing in Practice
Chapter 6 Building the Value-Based Price
Chapter 7 Value-Based-Pricing Methods
Chapter 8 Building the Value Proposition
Chapter 9 Value-Based Selling
Chapter 10 Building a Value-Based-Pricing Strategy
Chapter 11 Contemporary Pricing Issues
Appendix A Legal Issues in Pricing in the European Union
Appendix B Case Studies for Chapter 10
Additional Reading
Notes
Index

Excerpt

CHAPTER 1

What Is Value?

What is a cynic? A man who knows the price of everything and the value ofnothing.

—Oscar Wilde

The word value is used so often in business and so loosely that it is indanger of losing whatever meaning it had. In short, the concept of value itselfhas become devalued! In reality, value is the core driving force underlyingevery business decision. Therefore, it is important that we know what it is andhow it is defined and used in order to yield real insights into our daily work.

Although easy to ask, this question is really difficult to answer. We discoveredjust how difficult when we challenged managers from different companiesto come up with a robust definition. Here are just some of the answers we heard:

• "Value is getting more than I paid for (or expected)."

• "Value is the perception that I need your solution more than someone else's."

• "Value is perceiving I've had a good deal."

• "Value is getting a feel-good factor from a transaction."

• "Value is making my life a bit easier."

• "Value is a mystery!"

Alan Watson, a London taxi cab driver and greengrocer, had this to say aboutvalue:

My family has owned and operated a fresh fruit and vegetable stall in London formore than 90 years. We have come through two wars, a great depression, and adeep recession. We are about to go into another recession. We survived all ofthese, and we will survive the next one too. How? By listening carefully to whatpeople want, doing our best to give them it—and even a little bit more.People are more interested in value than price, and that's just what I givethem. I have customers who have been coming back to me for more than 40 years!

Alan's message is simple, durable, and actionable: "Understand exactly whatpeople want—and give them it!" This is the complete theme of this chapter.The message is simple, but we need to interpret it in the context of thecomplex, technology-driven, and intensely competitive corporate world of thetwenty-first century.

COMMODITY OR NOT A COMMODITY?

Most of us probably would agree that when it comes to commodities, water is afairly basic one. When we turn on the tap, we expect water to come out. Here inthe United Kingdom, that water is potable and, according to Thames Water, veryinexpensive, at around 0.002 cent per liter at the time of writing. On thisbasis, why would anyone want to pay any more for what is, after all, justH₂O? Clearly, a lot of people do. The U.K. bottled water market isworth close to £1.5 billion per year—a high price for something that is soinexpensive from the tap. Somehow the bottled water companies have succeeded indifferentiating their offering against tap water—and their othercompetitors—very effectively. In doing so, they have created benefits inthe minds of consumers, perceived or real, to which consumers clearly attachsome value. This perceived value is both tangible and intangible. Customersjustify their purchases generally on the basis of logical arguments—it'sconvenient, it has fewer chemicals in it, it's purer, and it's healthier.

How much of this is actually factual and how much is the result of marketingefforts is open to debate. However, value is derived from convenience (you can'ttake a tap with you!), perceived health and taste benefits (despite ThamesWaters' tap water coming in first in a blind taste test some years ago), andimage (if the people at the next table in the restaurant are drinking volcanicwater from New Zealand, your jug of tap water is going to look a bit sad!Claridge's Hotel in London now has a water menu to sit alongside its wine menu).And the price of a bottle? Anything from a few pennies a liter to $75 and more.For water! Simple H₂O with a little extra—brand image, cachet,a bottle designed by Jean Paul Gautier. So what is water really worth? Is it0.002 cent a liter, or is it $75 or more? Or even ... how much would you pay fora liter of water in the desert?

If a basic commodity such as water can be differentiated so broadly andeffectively, imagine what you could do with your own products and services.

SOME INTERPRETATIONS OF VALUE

Let's drill down a little into this thing called value and try to pullout a few important truths that will help us on the way to creating a robustdefinition.

Value as a Perception and an Expectation

When we compare one offer with another, we select the offer that captures mostcompletely whatever we are looking for. Our belief in its ability to actuallydeliver what we expect is based on perceptions alone if no other objectivesource of information is available at the time of purchase. In this scenario,the buyer is conditioned by the messages received prior to or at the same timeas the purchase. Objective reality does not "kick in" until rather later whenthe purchaser has had time to reflect on the transaction and to observeperformance in use.

Value as a Quid Pro Quo

In this situation, we expect a fair transaction in which the worth to us of theitem purchased is at least equal to (and certainly not less than) the sum of thesacrifices we make in procuring it—time to search for and choose fromamong options, cost of money to purchase, the price itself, and any associatedpsychological risk factors. The sacrifice is not of a monetary nature alone; italso reflects our time and effort in seeking out the good in question and islogically the best use of the limited resources at our disposal. In short, thisis a rational buyer's expectation.

Value as an Enhancement of Our Situation

A consumer or a business manager will invest his money in ways that will improvehis life in some meaningful manner. While he might be willing to accept a quidpro quo offer, he is delighted if he actually receives more than he expected,especially if what he does receive genuinely enhances his situation.

WHY DOES VALUE MATTER TODAY?

From our work with many companies, we have learned that clear advantages accrueto businesses that apply a value-based approach to their thinking. A focus onvalue is really a focus on understanding the actual needs of customers andfinding a unique and differentiated way of meeting those needs effectively andefficiently. As soon as we identify a unique approach or create a cleversolution, it will be copied quickly. Consequently, a value approach demandssingle-minded commitment to innovation and creativity—and a sustained andsingle-minded search for uniqueness. Managers of value-oriented businesses areconstantly on the lookout for new ways of meeting, perhaps even anticipating,their customer's needs and doing so in a manner that permits them to exploittheir uniqueness.

A frequent challenge salespeople hear is that their products are "justcommodities." While this may be true in some cases, it is usually put forward bya shrewd buyer as a ploy to extract some undertaking from the salesperson,usually in the form of a discount or some other deal "sweetener." If we havegenuinely incorporated into our product-development processes and our service-delivery activities a real focus on customer value, this should enable us torespond in a manner that repudiates any assertion of commoditization. In short,a value-based approach to business provides an excellent counter to thechallenge of commoditization. Differentiation is not just about doing somethingdifferent. It is about doing something different in a manner that really mattersto your customer. By clearly focusing on your customers' needs and pain points,you can uncover novel ways of serving them.

A value-based approach generates lasting customer relationships that are moredifficult to dislodge than relationships based solely on price. In this sense,product and service life cycles reasonably can be expected to be significantlylonger than those which are not based on understanding and delivering realcustomer value.

THE VALUE TRIAD

Value means different things to different people. Even for the same person,different contexts may create different value perspectives. For instance, theexecutive traveling on business may opt to fly British Airways because of herperception of superior service, access to business lounges, and perhaps evenprestige. However, if she travels at her own expense, cost becomes a morecompelling factor, causing her to choose a budget carrier instead. Thepurchasing context and who is paying have a profound impact on the decision.

Value can mean perception, an exchange, or even an economic enhancement. Asingle, simple definition is inadequate to capture this completely. For thisreason, we developed the Value Triad concept as a practical tool to capture asmuch as we can of the richness and variety of meaning encountered in value(Figure 1.1).

We define the three elements of the Value Triad as

• Revenue gains (RGs)

• Cost reductions (CRs)

• Emotional contribution (EC)

Revenue gain and cost reduction both focus on the functional, tangible, andobjective elements of value, whereas emotional contribution, as its nameimplies, focuses on the less tangible, more subjective measures.

Revenue Gains (RGs)

These are the improvements in revenue that accrue to a customer as the result ofthe purchase and use of your products and services. Outcomes such as superioryield from manufacturing processes or service-delivery initiatives or greaterrevenue streams perhaps through the ability to create and sell a better and morecompetitive service, the ability to charge a premium price for products andservices in turn, or the ability to increase market share all generate revenuegains.

Cost Reductions (CRs)

These involve our ability to help a customer reduce costs through the use of ourproducts and services. This is not merely about reducing the price of purchasedgoods and services. CRs for your customer also can be achieved by reducingdirect labor hours, having longer periods between servicing, employing lessexpensive personnel, training staff in new skills, reducing short- and long-termcapital expenditure, and so on. CRs must be achieved without compromisingsubsequent value delivery to your customer's customer.

Emotional Contribution (EC)

This arises from many sources and is in general linked closely to the "feel goodfactor"—for example, reduction of "hassle," peace of mind, increasedconfidence, greater safety, pleasing to the eye, personal gain, trust, self-esteem, absence of risk, and so on. There are lots of these, but to appreciatethem fully, we need to put ourselves in our customers' shoes and see the worldfrom their perspective! While there may be quite a high degree of alignmentaround the more tangible economic factors, executives often have quite differentopinions about what affects them, personally, from an emotional perspective.This makes it very difficult to create a universally acceptable, objectivelyverifiable quantitative estimate of emotional impact. Emotional considerationshave a profound but hidden impact on the overall attractiveness or evenacceptability of a proposal. What may be an overwhelmingly attractive economicoffer can be overturned by an adverse emotional viewpoint of a key decisionmaker.

VALUE DRIVERS

A value driver is any factor that, if a business acts on it, leads to anenhancement of competitive advantage. Business-to-business (B2B) drivers aremostly economic in nature. In business-to-consumer (B2C) situations, these arelikely to be largely intangible. This is not to say that it is impossible tofind intangible or even emotional drivers in a B2B transaction. After all,business is an interpersonal affair. Likewise, while many consumer purchasedecisions may be emotional, perhaps even impulsive in nature, many are driven byeconomic considerations—increasingly so during times of recession orfinancial stringency.

Economic value drivers are factors that ultimately result in increased revenueor decreased costs. These factors tend to increase profitability orreduce/eliminate economic losses, and these factors can be measured orcalculated with relative ease.

Emotional value drivers are factors that ultimately lead to some improvement inthe customer's emotional satisfaction or the avoidance of a reduction of hisemotional satisfaction. These "intangible" factors are much more difficult tomeasure or calculate. Nevertheless, we must try to assess the "worth" of an ECelement to a customer in a given context and its relative importance in thebuying decision. If there is little difference between competitors on RG and CRelements, the EC factors become very important drivers of the final decision andperhaps even a tie-breaker!

Some factors contribute to both. For instance, a company manager whose purchasedecision leads to his company achieving or increasing profitability also willexperience some feelings of satisfaction and improved self-esteem.

Later in this book (Chapter 5) we take a close look at how the ValueTriad can be used to identify the principal value drivers of a particularproposition and how we might go about identifying suitable metrics to assesstheir impact on our customers' businesses.

In Figure 1.2 we identify the extent to which different Value Triadelements have an impact on a "typical" B2B transaction and a "typical" B2Ctransaction. Usually B2B decisions are based largely on economic factors.Managers tend to emphasize the CR consequences more than the RG consequences ofa decision. It is relatively rare in B2B work that EC elements are consideredexplicitly. There are powerful EC impacts from what appears at first sight to bean economically driven choice. The offer is unlikely to be accepted unless itcan be demonstrated objectively to have economic value. But we also must searchdiligently for any EC impacts while constructing a value proposition.

EC is dominant in many B2C transactions. CRs are also common in B2Ctransactions, for example, in relatively mundane transactions such as weeklysupermarket shopping. Economic factors play a significant role and complementthe EC created by packaging, branding, and advertising. Indeed, when money isscarce, as in recessionary conditions, cost awareness increases dramaticallyamong some segments of the community and may dwarf EC factors. RGs arerelatively uncommon but do exist, for example, in investments individuals makein their education, self-improvement courses, and services to facilitate jobfinding. During recessions, we might expect CR elements to become more dominantin the consumer purchase decision. The ideas we discuss here have a significantimpact on our thinking about managing channels to market and how we might craftdifferential value propositions to different "players" in the channels. We lookat this more closely in Chapter 8.

DIFFERENTIATION

Differentiation describes any aspect of our total customer offer that isdifferent from that of the competition and, crucially, that is valued by thecustomer. It is a lot more than a mere difference in specification. Our productor service may well be different from that of the competition, but unless thisdifference delivers real value that the customer can identify with, understand,acknowledge, and be willing to invest in, then it is merely a point ofdifference—nothing more. If we can manipulate some aspect of price orperformance in a way that mobilizes our unique capabilities and in a way that nocompetitor can possibly emulate and as a result create an elegant—perhapseven unique—solution to a customer's problem, then we have a winningproposition. This is infinitely easier to say than to do. Never underestimateyour competitors' abilities to surprise you. And never, ever make the assumptionthat your differentiation will make the competition irrelevant. This is bothfoolish and dangerous. The question you need to ask is, "What can we do, inrelation to our total customer offer, to encourage the customer to choose us andremain with us?"

This distils down to, "What are the critical differences between us and thecompetition, and how do they influence the relative value the customerperceives?" Note that this absolutely must be from the customer'sperspective—not ours. Our views are irrelevant—we are not the buyer!Our success in meeting a customer's requirements is based, at least in part, onlistening to (and fully understanding) the customer's context, value-addingprocesses, and "pain and pleasure points" and how we can mobilize thisinformation in the creation of a product or service that offers realdifferential advantage from that customer's perspective.

(Continues...)

(Continues...)

Excerpted from Value-Based PRICING by Harry Macdivitt. Copyright © 2012 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: McGraw Hill
• Publication date: 2011
• ISBN 10: 0071761683
• ISBN 13: 9780071761680
• Binding: Hardcover
• Language: English
• Edition number: 1
• Number of pages: 304