Back2Basics: True importance of value-based pricing
“Companies who don’t understand the value they create for customers are flying blind on pricing.” — Marketing Week
by Mark Eardley (@mdeardley) That’s the hard-nosed opinion of Mark Bergen, a pricing expert and professor of marketing at Carlson School of Management, University of Minnesota.
For B2B marketers, it’s an opinion that warrants serious consideration. Flying blind on pricing always has two ugly consequences: sales are lost to fractionally cheaper competitors or deals get done at miniscule margins. That’s what happens when B2B companies don’t understand how they create value for customers.
If you don’t understand value, you can’t qualify and quantify it — you can’t measure it. Which means you can’t manage it and improve it. The result? Constant haggling over price in a plummet to be the cheapest.
Understanding value: define it, measure it, deliver it
My views on Value — with a capital V — go back almost 25 years to a 1994 book, “Touchstones: Ten New Ideas Revolutionizing Business”, by US management consultant, William A. Band. In particular, I became interested in value-based buying motivators — the reasons driving the decisions that create every B2B vendors’ sales and margins.
Band’s book got me thinking about my previous decade’s experience as a B2B marketer (yep, I’ve now been in that game for over 30 years…) and I realised that one could create a mechanism — a structured, analytical methodology — that would enable any B2B firm to define and measure how their products and services create value for everyone who influences buying decisions. So, by ’98, that’s what I’d created, an analytical process based on what I called ‘the five factors of Value’ — response, service, quality, time and price. Read here about how that process works and why these factors are B2B’s ‘big five’ buying motivators.
Much more recently, one of the really big guns in management consulting began sharing its latest thinking on value, its constituents and the dominant role it plays in motivating B2B buying decisions. As you might perhaps expect from an A-List, top-billing consultancy, it’s massively complex in comparison to my keep-it-simple approach to defining, measuring and delivering Value.
Bain & Company: value from a big gun’s perspective
In March 2018, the Harvard Business Review (HBR) ran an article headlined, The B2B Elements of Value, written by three Bain consultants, Eric Almquist, Jamie Cleghorn and Lori Sherer. Naturally, I was more than somewhat interested in a topic that’s been a strategic focal-point of my B2B approach for 20 years.
My interest’s supercharger kicked in when I read how Bain had identified these elements of value. It had been done by an analysis of: “quantitative and qualitative customer studies that our firm had conducted for clients over three decades, examining what mattered most to buyers. From this research, we identified 40 fundamental ‘elements of value’.”
Forty fundamental elements of value. Ranged against my boiled-down core of just five, Bain’s perspective initially appeared to be far more sophisticatedly complex. However… All of Bain’s 40 elements may be accurately categorised either as response, service, quality, time or price. All of them. Complexity simplified.
Although there might be nothing essentially novel in Bain’s perspective, it certainly adds heavyweight credibility to the reasons that it’s so important to develop an accurate understanding of Value and its all-powerful influence on B2B buying decisions. I recommend you read its HBR article, as well as the related, superbly presented content on Bain’s site.
It may be gratifying to have my thinking backed by Bain, but what’s much more significant is this: anything that highlights the merits of ‘working with Value’ is seriously worthwhile. It’s vital that marketers are strongly encouraged to develop accurate, detailed insights into what customers value and the reasons why. After all, those insights are a critical component in any B2B marketer’s drive towards a calibre of centricity that attracts and retains profitable customers.
Without such insights, Prof Bergen says B2B firms “are at a tremendous disadvantage to competitors who bring their marketers and customers into the centre of their pricing processes and capability development.” That tremendous disadvantage becomes apparent as sales get lost on price or margins are squeezed almost to zero because marketers haven’t defined and demonstrated the Value delivered by their offering.
Mark Eardley (@mdeardley) advises B2B companies on how to govern their marketing to attract and retain profitable customers; several of his clients have grown to become market leaders. He and Charlie Stewart have written Business-to-Business Marketing: A Step-by-Step Guide (Penguin Random House), which offers practical, actionable advice on how to make marketing make money. His monthly “Back2Basics” column covers how B2B companies and their agencies should manage their marketing.
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