How to practice value-based pricing that boosts profits and promotes better relationships with customers.
“Charge what the market will bear” pretty well summarizes the pricing strategy of many suppliers serving business markets. They believe that practicing value-based pricing means finding out what the value of their offering is relative to alternatives for their customers and then charging as high a price as they can. If they think their offering is superior, they include in their pricing the full premium that they think the superiority earns.
The Leading Question
If charging the highest price isn’t the best strategy, what is?
- Customers give suppliers they feel good about doing business with a bigger share and mix of their business.
- Best practice suppliers use pricing tactics that motivate the customer to take action that benefits the supplier.
- Suppliers that practice value-based pricing increase short- and long-term profits.
But pursuing value-based pricing in that way is usually shortsighted in two respects. 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. We’ll propose a framework for practicing value-based pricing in this more nuanced, strategic way. But consider first a recent case that demonstrates how the shortsighted pursuit of value-based pricing can go wrong.
Electron Instruments (a fictionalized name) manufactures and markets scanning electron microscopes. It has focused on the upper end of the market for SEMs, which ranges from $500,000 to $1.5 million per microscope. Even the low end of electron microscopes ranges from $100,000 to $250,000. In 2007, as a new initiative, Electron Instruments developed and introduced a desktop SEM that was intended to compete in the low end of the market and even attract some sales from customers that would upgrade from optical microscopes.
Electron Instruments believed that its desktop SEM was vastly superior to the next best alternative, a desktop SEM from a Japanese competitor. Electron Instruments did not, however, conduct any formal customer value research to validate that belief. Instead, it relied on its engineers’ assessments and marketing’s judgment based on qualitative feedback it received from a few beta test customers. Critically, though, these beta test customers were familiar with SEM technology, and most were users of the company’s top-end, expensive SEMs.