How to practice value-based pricing that boosts profits and promotes better relationships with customers.
Many suppliers serving business markets believe that practicing value-based pricing means finding out what the value of their offerings is relative to alternatives for their customers and then charging as high a price as they can. But “charging what the market will bear” isn’t always the right strategy.
First, it neglects other potential means of profiting from delivering superior value that may result in greater overall profitability to a supplier. Second, it weakens customer relations rather than strengthening them, which a more progressive and comprehensive approach to value-based pricing can accomplish.
There are several questions that an organization should ask to improve its pricing strategy, including: What is the marketing strategy in this segment? What is the differential value that is transparent to target customers? What is the price of the next best alternative offering? What is the customer’s expectation of a “fair” price?
By asking these questions and others, an organization can choose a price point that provides the largest long-term value to the supplier. The benefits of this approach include improved relations with customers that often lead to longer-term, more profitable relationships. Using this approach, customers are also more willing to collaborate with suppliers, which can lead to shared data and improved products. Suppliers that practice this kind of value-based pricing boost profits not only in the present, but they also set themselves up to profit over the long term.