What is preventing your organization from taking advantage of a pricing strategy rooted in value?
Many organizations are failing to optimize their customer engagement and are leaving money on the table because they have been unable to implement value-based methodologies. Without having a clear understanding of how you are providing value to your customers, it will be challenging to define, position, and defend your pricing...making it incredibly difficult to get to a transaction.
I am very interested in understanding why organizations are challenged with adopting a value-based approach throughout their customer journey, from marketing to sales through customer success. What have been the objections you've faced or struggles you've had in implementing value-based pricing? Conversely, if you have implemented value-based methodologies what are some lessons you can share with others looking to do so?
Answers
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We are in the beginning phases of our journey towards deliverable/value based offerings. The barriers we've encountered in our early efforts were related to perceived risk of disrupting existing revenue streams as well as challenges from implementing the tracking and management systems necessary to support a value-based business. We had wanted to introduce some deliverable-based offerings into the current portfolio. However, since our current systems and processes were built around billable hours rather than deliverables, it was difficult to shoe-horn in new models without transforming our whole approach, backend systems, and business operations. We've decided to re-strategize our approach and are in the process of working with TSIA on a series of strategy workshops to accelerate our path to become an outcomes-oriented organization.
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@Benjamin Bloom "perceived risk of disrupting existing revenue streams" We see this alot, often when companies are looking to migrate existing offers to SaaS or when they want to complement existing offers.
Increasingly we are also seeing tension between professional services and customer success, where increasingly sophisticated customer success teams are nibbling at professional services revenues.
Roger Martin's strategic choice cascade is a good way to resolve these tensions, especially when combined with a value-based pricing framework. The first concern has to be the long term V2C (value to customer). Deliver value, communicate well, and there will be many opportunities to capture enough of that value to sustain innovation while delivering a return.
"If you can cannibalize your revenues in all likelihood someone else can too, and it is better to do it yourself than to have it done to you."
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Thank you for the insights and references, @Steven Forth !
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Another reason I have seen is that finance is concerned with achieving a certain profit margin and believes that the safest way to do this is with pricing that builds that profit margin in. In many cases this means cost-plus pricing.
There are a lot of problems with this of course. The biggest is that very few companies actually know how to allocate costs across product lines, and it is not an easy thing to do. Maybe, one day, if we really adopt activity based accounting, with the help of some deep AI, we will be able to do this. More important is that sunk costs are irrelevant to pricing decisions. They are sunk costs because they are in the past and you cannot do anything about them. The time to worry about the design or infrastructure investment required to offer a service is before you commit to developing it, which is why pricing should be considered before money is invested.
Value -> Price -> Cost and not Cost-> Price then maybe value.
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I asked this question on the LinkedIn Group of the Professional Pricing Society. One comment was that companies are unsure of how much value they are actually creating. For some that meant it is better not to know. A kind of 'don't ask, don't tell' approach. The other was that it costs money to research value and as there is uncertainty about the value there is uncertainty about the ROI on research about value so the research does not take place and so on in a negative feedback loop. The exception to this, in my experience, is the medical technology industry, where the HEOR practices (Health Economics and Outcomes Research) are well embedded and important to everything from product development to regulatory approvals to marketing.
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@Benjamin Bloom Thanks for sharing and apologies for not commenting sooner. Indeed, the difficulty in quantifying the potential risk to existing revenues is a common challenge which is why financial modelling and scenario planning become increasing important in our field. I do want to call out your observation of "challenges from implementing the tracking and management systems necessary to support a value-based business." We have been working to implement value calculators as it is essential for organizations to be able to track value deliver over the customer journey. I think another consideration is understanding what sort of data is being collected to inform this.
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Looking forward to exploring more of this subject during TSIA Interact with @Laura Fay and fellow attendees during our session on Demystifying Value Based Pricing. https://www.tsia.com/conference/agenda/session-detail?sessionName=Demystifying%20Value%20Based%20Pricing&sessionId=1065
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Looking g forward to the session with Karen, sharing frameworks and industry examples.
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An emerging best practice for value-based pricing is to have separate value models and pricing models and then to connect them. Of course the pricing model is generally derived from the value model, but having these as two separate but linked objects is critical.
The value model is then very useful as a way to connect the different business functions, from offer development (product and service management) through marketing, sales, implementation and customer success.
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"One comment was that companies are unsure of how much value they are actually creating. For some that meant it is better not to know. A kind of 'don't ask, don't tell' approach."😵
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