Pricing is one of the hardest things to get right in the B2B sales. There are three main types: Cost based, Competitor based and Value based. To take each one in turn.
- Cost based is where you have figured how much it takes to make your product and have put 20-30% on top of this as margin and this is your cost. It works for a bit, but then you start to realise that you are selling it too cheap, so now where do you go?
- Competitor based is where you have looked at what your competitors are doing and in an attempt to win business from them, you have undercut them by an amount just large enough for your customers to go with you based on price. Again, it works for a bit but then it becomes a race to the bottom and you will be in a place where you have to give the product away for free to get the business!
- Finally, value based. This is where you want to try and get yourselves if you are to survive. It is the optimal strategy but the hardest to figure out because there are so many variables.
How do I arrive at a value based pricing model? Follow these 4 steps:
- Focus on a single segment – don’t focus on multiple segments, just the one
- Compare with the next best alternative – compare with the solutions a buyer could purchase instead of yours. If no alternatives exist in your market, value based pricing wont’ work very well
- Understand differentiated worth – figure out what feature is unique to the competitor’s
- Place a £ amount on this differentiator. This is the hardest step and so most marketers use conjoint analysis or qualitative customer interviews to help them.
Value-based pricing is an effective method to price products. It is a hard thing to do and once you have done it once, does not mean you won’t have to revisit. With a stronger grasp of how this method works, marketers will be able to make smarter pricing decisions, and employ value-based pricing to increase profits.
Want to learn more about pricing and sales strategy? Book a consultation with Sales for Startups today.