In these times of economic stringency, it becomes more and more important, and at the same time harder and harder, to resist pricing pressure from customers. Yet there is no alternative; most firms are not, and cannot become, the lowest cost producers in their industries and so cannot prosper in an environment where customers have the upper hand and use their power to drive prices ever lower. This book on value-based pricing is therefore timely.
The message is that, when we set prices, we should focus not on our costs or on what our competitors are doing but on the value that our customers perceive in our offering. We are offered a systematic way of thinking about what this is, and reminded that if we wish to be rewarded for this value we need to offer something distinctive.
The authors then move on to look in more detail at how we estimate value and present a range of pricing strategies for capturing as much of that value as we can. This is comprehensive, within the limits of the quantifiable and the objective.
If the book has a drawback, it is in an incompatibility between the subject matter and the sorts of approaches with which the authors seem comfortable. The impression is of a book by engineers or accountants who can deal very effectively with situations in which value can be precisely quantified, but struggle or feel uncomfortable when the question becomes more subjective. We see this in a comparison of two of the case studies. One, the sale of a genetically engineered protein for use in pharmaceutical manufacture, carefully deconstructs the customer's economics and comes up with very precise suggestions. Another, about a range of bathroom fittings with a coating that makes them easier to clean, highlights the fact that they offer additional value but ducks the question of what price premium they should command.
The authors' method for determining the value perceived by the customer recognises emotional considerations as one of three factors, but deals with them much less effectively than the other two (revenue gains and cost savings, both of which can be reduced to numbers). They cannot deny emotion plays a part in business-to-business sales, but try to downplay it.
I suspect there is an element of wishful thinking here. Remember that IBM, in its glory days as the dominant supplier of mainframes, did well from the idea that 'no- body ever got fired for buying IBM', an emotional benefit if ever there was one.
There is no discussion of branding or reputation, an omission that the likes of McKinsey and PricewaterhouseCoopers would contest.
The book is extremely detailed and quantitative, and the overall tone is dry and academic. For example, one comparison of copier products uses 12 attributes, with weights expressed to two decimal places and cost of ownership calculated to six significant figures.
My experience of pricing decisions in highly technical business-to-business markets such as professional services, banking software and engineering components tells me that, even in such markets, estimating a customer's value perception and pricing accordingly is as much an art as a science, and here the book offers very little help.
Another striking omission is the 'Goldilocks principle' - the strategy to use when you can't segment the market, work out its value preferences or make any sense of it at all. Goldilocks can be applied in a moment with very little thought, insight or information, yet can produce great results. The omission here can only be due to the authors' discomfort with imprecise situations.
Neither is there any consideration of the bizarre and fascinating psychology of value perception offered to us by the behavioural economists, notably Dan Ariely.
You will find this book useful if you are from a quantitative background, appreciate a highly systematic and detailed approach to questions and distrust or feel uncomfortable with emotional or subjective factors or intuition. But, if so, you should ask yourself if you should be dealing with pricing decisions on your own or ally yourself with a colleague with a bit more intuitive flair and a higher tolerance of uncertainty, imprecision and the inherent messiness of human life.
Value-Based Pricing: Drive sales and boost your bottom line by creating,
communicating and capturing customer value
Harry Macdivitt and Mike Wilkinson
- Alastair Dryburgh is an MT columnist and head of Akenhurst Consultants.