Episode #0084 - Why do so many companies ignore value based pricing?

Pricing College Podcast

In this episode of Pricing College - we discuss why so many companies do not practise or invest in value based pricing.

We discuss that value based pricing is difficult but very rewarding - and explain that many companies are not developed enough to truly pursue this systematic approach.

In today's episode, we want to ask the question, why do some businesses push back on value-based pricing? Or why are they not seemingly interested in value-based pricing?

It seems strange that a lot of companies still today don't think or consider using value-based pricing in their business. When I say that it's both B2B and B2C. I think to answer the question, in short, it was really because people don't know-how. Potentially this is because they spent a lot of time doing basic cost-plus pricing that they really forgot. Or they really don't know how to do value-based pricing. But what is value-based pricing? It's really a method of understanding your customers and what they value about your business. And that takes a little bit more time and thought.

I think fundamentally, companies don't do or don't practice value-based pricing for the very simple reason that it is very difficult. To practice real value-based pricing, you really have to be top of your game. And obviously, you can move in steps in that direction. But let's be honest, a lot of companies are not very good at it or anything. A lot of companies focus all their efforts on one area, whether it's operations or delivery, or whatever it is. And very often, I’ll be honest, I've seen very few companies who really focus on customer value or value-based pricing. It's almost it's not saying that, why do companies not do it? It's almost always the question is, can name companies that do it?

Strangely, even if a company says that they're specialists in the supply chain, operational management, production, things like that. That could be in oil and gas distribution. That could be a very traditional B2B sector where pricing and customer is not a priority for them. But that really should be. Because with all of those things, supply chain everything should be positioned and focused on what the customer wants. Because basically, every business that sells to customers is there because of their customers. And if you don't understand what your customers value, then everything else falls apart. Your supply chain or being efficient is not focused on the right things. You're not buying the right things, Are you delivering on time? etc, etc. So even if you think being value-based is simply a pricing thing that you can leave to later on. It's something you should consider and it's something that's embedded in the entire business model.

I think a lot of companies who do value-based pricing in one way or another many of them fall into it. They don't have a structured process, a Value Management System, they don't have that. If you look at a lot of companies who are in the luxury goods market. They are aware that intuitively to some extent that they have to maintain the value of their product or service. But, do they really manage that value? Do they study it? Very often not. The number of companies who really do it is very small. It is due to the difficulty of it. And nearly any company I've ever seen, there's always an important problem that has to be fixed today. There's always firefighting and issue management and trying to rectify today's crisis, let alone billing the future. Even if you look at a Silicon Valley startup, which arose in the media these days. Most of them don't have value-based pricing or value-based methodology. And the reason I would say what I would suggest for that is that they're still trying to actually come up with their business model. They're pivoting, they're trying to work out how they sell to customers. They're trying to actually win customers, before even optimising or truly understanding where they're trying to get to.

I suppose when I've seen businesses attempt value-based pricing, two things happen. They either outsource the value discovery to a market research agency. Who in turn provides very intellectually stimulating observations about, why customers like or dislike the business? And, often break that down into customer satisfaction. However, the problem with that is in terms of pricing. It's very difficult to integrate that tight type of very loose generalised observation into your pricing, especially on a product level. The second thing I see and this is even common in leading FMCG businesses, they say that they're doing value-based pricing. But ultimately, it's still cost plus with a little bit of value, add on at the top of everything else. So if they look at the price ladder, its costs, costs, costs. What are the competitors doing? Another markup and then, how valuable are we? “ oh, we think we're about that or let's add another 10 cents.” That sort of thing. It's not very scientific at all. Fundamentally, it comes down to skills gaps in analytics. There are huge knowledge gaps in value-based pricing. And there's a lack of strategic thinking about how to integrate your pricing to drive a value-based business model.

I think we have to look at there's the journey, there's the destination. A lot of companies have a lot of problems. We always hear in the press and anybody who's worked in a corporate is aware that there are skills gaps. There's corporate culture issues, those sort of things. It's very rare to really work on a championship-winning team. To be part of a great team and system and process, it's really delivering results. Those companies are later few and far between. And even when companies hit them, Are they able to maintain that over a long period of time? It is debatable. But I think the point I would make is just because something is very difficult. It doesn't mean it's not worthwhile doing. You don't have to achieve 100%. But the closer you get to it, the better the business will be. It's like going to the gym in any way, shape or form will benefit your health. You don't have to become obviously Arnold Schwarzenegger. But you have to do some steps and further along that line you get, potentially the better. But we have to be honest, it is tough, it is hard. You do need to work hard. The company needs to put a lot of effort resource focus on value management and really embedded into the company.

Maybe it's not like resistance to change, resistance to something new. It's more resistant to learning. Maybe not challenging thinking assumptions about value. Because often we when we've done workshops on value, for instance. I've been surprised to find how difficult even identifying internal value drivers can be with stakeholders. It's almost as if that's never been thought or a question on their mind. So the articulation of value, even from a hypothetical perspective. It hasn't been tested on the customer. It's literally internal is still very ambiguous. So, what can you do to go from there? You need frameworks. You need proven frameworks to help you think through the problem. These things do exist. There are processes in place. As Aidan said, it really now is time to sort of have that sort of step-change. Think slightly differently and start testing those assumptions.

Of course, different companies have different lifecycle stages. Whether new startups, small businesses and very large corporations. They've got very different needs, very different objectives. The mode of focus and resource putting to this sort of stuff will change hugely across all types of companies. Whether it's a small, one-man-band or whatever like that. They just need to have a few thoughts a week or a month and what they're actually trying to achieve. To the point of where you get to a major corporation where they really have to think about, what their differentiators are? How they're focusing on winning customers? Whether better or worse at certain value categories. So it very much varies along the line. The other thing I think will say is business is tough. Every aspect of the business is tough. We can't dress that off. Obviously, some companies are going to be better than others at doing these sorts of things. Fundamentally real top quality Value Management is what separates the great achievers, the big companies from the lesser lights.

The successful people that I see implementing value-based pricing well inside businesses are those that have almost resisted organisational norms risen above. In spite of everyone telling them not to do value-based pricing. They've done it anyway. And they've really challenged that cost-plus thinking. They've even developed their own sort of models. They're even tried to develop frameworks and things like that in place. So they can pretty much capture more revenue and margin for the business. Over time, because they repeatedly through their methodology, which has value-based gain more traction in the market, more additional margin than anyone else. And everyone's wondering, how can they do it? And no one else can. They get seen by the executives as being high performers. From there they rise through the ranks. Rightly so they're the ones delivering value. But the unfortunate thing in this is that often that there's not that commitment from senior management from the executive team. To give very smart people like that the bandwidth to do the best work they can do. And so often it just becomes ad hoc here and there. It never becomes a rounded complete piece of work. So I think I'm saying here that yes, you can invest in great smart people. But if you don't give them the bandwidth to try and test and learn new methodology, and start embedding value-based pricing in the business. It will only ever be a concept. It won't work out. So the executive team need to give teams that space to learn and trial test. Because with that space, they'll be able to prove to business within three to six months that value-based pricing works and then everybody else gets on board.

I don't think I've much else to add to that. I think with a lot of things, it's just getting started. It's knowing the direction you want to go in. It's putting in place systems or processes and milestones etc that will help you get there. So, yeah, as they're all saying “the first step is the most important on a long journey”. So yeah, that's it for me.

I suppose never feel that you can't ask, we are a good resource. We know people out there that implement these sorts of things. If you need advice on training providers or things like that. Please feel free to ask us any questions we can get you started with all these types of value-based concepts and implementations. So yeah, taylorwells.com.au or feel free to get in touch with me personally.