Updated: Mar 20, 2022
In most businesses, the 3 key metrics that decision-makers need to work out every year are 1. Price, 2. Volume and 3. Mix. Among these 3, Pricing is one of the most discussed topics in the business world, because it is something companies can control (relatively), compared to volume and mix that are more demand driven.
Before we discuss how companies can get to value based pricing, let's bust some myths around this topic.
Myth 1. Value based pricing is the only correct way to pricing
While value based pricing is a great strategy on paper, the challenge is that most companies don't have the data and insights to determine the "value" to customers for their products. In our experience, very few companies have the data to have a legitimate attempt on value based pricing.
Myth 2. Cost based pricing should not be used at all
Only if you already have a working value based pricing in place. While we agree companies can extract more value with value based pricing, we still believe there are different levels of sophistication within cost based pricing, and it is still benetificial to increase your maturity level in pricing even if they are currently cost based.
Pricing Maturity Levels
Based on our experience of implementing price strategies ourselves and consulting clients on pricing topics, we believe there are 5 levels of pricing maturity in our view:
Level 1: Foundation
In the phase of figuring out what is what with your pricing
Likely still struggling with data availability and quality
Level 2: Scenario Planning
Good data is now in place
Starting to look into what different pricing could mean in terms of incremental profits
Level 3: Transactional Pricing
Having a view of how your input costs might change, hence how your prices need to change
Starting to have price governance in place to enforce margin rules
Level 4: Machine Learning-based Value Pricing
The first level of value based pricing
Leveraging machine learning to determine the value of your products
Level 5: Deal Level Pricing
The second level of value based pricing
Leveraging machine learning to determine how to price each deal individual, based on customer characteristics
The last 2 pricing levels might seem daunting to most, but our recommendation is to take your pricing journey step by step - identify what is missing in the next immediate level and make progress over time.