Why Value Pricing Initiatives Fail

Some of the time when prospective clients contact us requesting help on pricing, they have already implemented value pricing but it has not worked, i.e. the average net price to the customer has not improved. Of course these are marketers of value-added solutions where value pricing sets the price in proportion to the value the customer receives which almost always should yield a net price improvement. In this article we share our insights into the causes of value pricing initiative failures and tips on how to avoid these pitfalls.

Lack of Value Selling
Value pricing will not succeed as a standalone initiative. If the value of the solution is not being sold, then there is no reason to believe that the net customer price will change just because the pricing structure has changed. As we dig deeper we see that this problem is symptomatic of the number one failure cause of all business improvement initiatives - lack of executive sponsorship. In large companies with separate marketing and sales operations, marketing may be trying to improve profitability by implementing value pricing while sales is trying to do the same thing by implementing sales force automation. Unless both organizations have common executive sponsorship and are working on value selling process and tactics at the same time that they are aligning price to value, they are sure to fail and the statistics bear that out. Sales will see it as just another price increase and will sell the way they have always sold - many times focused on features and functions rather than value. When they close they are in no better position to command a better price then they were before.

Value selling is not easy and in some cases well coordinated initiatives of value selling and value pricing are implemented simultaneously with no measurable impact. If a well intended value selling program is not managed properly with appropriate training, metrics, and skills development, it will not succeed and fail to improve net price to the customer even if the price is well aligned to the value created by the solution.

Value Alignment
Value pricing is not easy either. It is not simply incrementing price for each new feature or function. It requires understanding the customer's business processes and being able to understand how these processes are improved by the solution - and how much those improvements are worth. So, while the very intent of a value pricing initiative is to align price with the value the customer will receive from a solution, attempts are not always successful. For example one company studied workflow of a customer clerk and quantified the time savings their solution created. They then used the "number of clerks" to scale their price thinking logically that the total value would be in proportion to the total time saved and therefore proportional to the total number of clerks. When the initiative failed and we got involved we learned that number of clerks was not well correlated with the value created by the solution but rather value was created by the incremental transactions each clerk was able to process because of the solution. Further study demonstrated that potential incremental transactions were highly correlated with the customer's current total transactions which was then used to scale the pricing instead of number of clerks. This change resulted in less money being left on the table and improved closure rate on the low end of their market.

Competition's Pricing Practices
Sometimes you find out that there has been a cat in your sandbox. Competition can damage a market by under pricing to the extent that value selling and value marketing cannot overcome. We are not talking about those companies that are simply focused on operational excellence and have a cost advantage. Those companies have to be dealt with by superior offerings, technology leadership, and customer intimacy. No we are talking about desperate companies that have unsustainable pricing practices that damage not only their competition but also their customer's long term profitability by forcing vendors to focus on other more profitable markets. Fortunately, many of these vendors fade away before they can create any permanent damage. Customers are usually wary of someone who has a price that is way out of wack. The best way to fight these sand box litterers is to leverage the natural fears concerning the stability and long term viability of these vendors.

Summary
The higher price that companies command who have coordinated efforts to market and sell the value of their solutions does not come easy. It requires truly understanding the financial impact your solution has on your customer's operation and being able to forecast that value in the sales process and documenting actual results for use in marketing. Why do it? Because the leverage is huge. Any incremental revenue received from the customer goes directly to operating profit.

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