How to Develop Your Value-Based Pricing Strategy
- Due to its potential to maximize revenue and profit, value-based pricing has become an increasingly popular pricing approach
- However, organizations often are confused about what to consider when developing a value-based pricing strategy
- There are five key elements to consider when seeking product, marketing and sales alignment on the value-based pricing strategy for an offering
So, you’ve been talking to buyers and working toward a value-based pricing strategy for a new offering. Now it’s time to articulate that strategy to ensure product, marketing and sales alignment – but what should be included?
Developing your pricing strategy – especially when it’s based on value (rather than cost or competitive price) – is not just about setting a list and floor price. It’s about how to configure and package the offering, the pricing model to be used, and the alignment of pricing and packaging to the offering’s market goals. Decisions on pricing and packaging affect the organization’s ability to drive revenue and profit, expand or tap into markets, land and expand within customer bases, cross-sell or upsell other offerings, and ensure retention.
The following are the five key elements to include in your value-based pricing strategy:
- Target buyers: features/outcomes required and willingness to pay. Understand buyers and their needs. Are there multiple buying segments with different needs for outcomes, functionality and appetite for your organization’s offering? For example, does one segment require customized branding, reporting and analytics, while another requires just the basic capabilities? If so, these differences should be leveraged for product offering configuration and packages. Expect that buyers’ willingness to pay varies from one segment to another. Conduct buyer-value interviews and quantitative research to identify the price range that each segment has indicated they are willing to pay. Document the willingness to pay for niche features such as customization.
- Packaging strategy: packaging approach and goals. The packaging strategy specifies the approach to packaging. Are you intending to use packaging tiers (e.g. all-in-one, à la carte)? The dependencies include the demand type – or market situation for the offering – as well as the uniformity of buyer needs. The packaging strategy includes the price metric as well as the detail on packages to be offered, high-level components and features, and whether services are included or they are offered à la carte. Finally, indicate which packages target each segment, which will be used for cross-sell and upsell, and which serve as trial offerings.
- Pricing model: the optimum price metric. With the advent of recurring revenue offerings, organizations have become more creative with pricing models to balance revenue and value. Pricing models range from flat-rate models to usage models or other approaches such as a razor/razor-blade model. This model offers the basic offering at a low cost (or no cost) with the intent of ensuring a flow of higher-margin sales for the complementary or “refill” product. Seek to develop a pricing model with an optimized price metric or the chargeable element. An effective price metric ensures the buyer gains additional value each time they purchase an additional unit of the offering and that buyers purchase additional units of your offering as they grow.
- Pricing strategy: price points and market positioning. Identify the price ceiling and floor as well as average selling price goals. This component should include the price positioning – that is, how the offering is priced vs. alternatives that buyers purchase to solve the same or similar problems. Indicate how buyer willingness to pay, profit goals and market goals for the offering played a role in identifying the price points.
- Pricing support: pricing-focused sales enablement. Sales reps need strong enablement tools to support value-based pricing. The last element of a strong pricing and packaging strategy identifies how the team will be enabled on price and what will be provided to the sales team to support price. Will testimonials with ROI be provided? Will value-actualization tools be available? Additionally, identify non-price levers that sales can use to negotiate (e.g. extended term lengths, lower service levels, pre-pay discounts).
For more tips on developing and articulating your value-based pricing strategy, download The SiriusDecisions Pricing and Packaging Blueprint overview.