Holden Advisors is my favorite source for pricing wisdom. In their latest newsletter, Mark Holden writes:
“Value-based pricing is a bit like a magic show – everyone watches and enjoys, but they don’t really know how it’s done. We are told to just go out and ask customers what they value and how much they value it. It’s accepted that once we take this obvious step, all of our hidden pricing power will be revealed. This is the magical view of value-based pricing. The real world is far more unforgiving and complicated than this.
“Value-based pricing” is based on having offerings that are differentiated from the competition in a way that produces measurable financial results for customers. If you don’t have this, then your offering doesn’t have pricing power. With no special services that make the difference, you are at the mercy of hard-negotiating customers who won’t pay a penny more than the cheapest credible alternative.
Since the majority of products and services are sold into highly competitive markets with many just good-enough alternatives, this is a common situation. It’s also uncomfortable, because it points to the fact that product development and marketing teams did not do the work of understanding customer needs or research competitors’ capabilities. Maybe the sales team that always seems to be complaining about prices was right after all?”
I added the italics – because he’s talking about US – product managers. If we don’t understand the value to customers and create differentiated products, we’re not doing the fundamental task in our jobs. And we’re making our jobs far more difficult! If you don’t understand these two things, you can’t prioritize your requirements or backlog, or create a roadmap that doesn’t change next week. You can’t guide marketing communications or their agencies to help you promote the product effectively. And to Mark Holden’s point, Sales will forever be on the defensive on price, forced to discount to win new business.
How do you begin to understand the sources and perception of value? In B2B markets, it starts with understanding your customers’ business model and the process that your product or service impacts. If you can’t quantify your value proposition based on this knowledge, you’re at a big disadvantage. If performing your own research with customers isn’t an option, look for published KPI’s about that process to help inform your value proposition. In consumer markets, it’s the perception of value that makes a difference. You might use tools like the Price Sensitivity Meter to gain insight into price perception. In our Product Management Intensive® and Agile Product Management Intensive workshops, we walk you through these crucial steps and techniques to help you improve.
What techniques do you use to uncover value and differentiation? What are your challenges?