Join Stefan Michel for an in-depth discussion in this video The four capabilities of value-based pricing, part of Value-Based Pricing.
- The reason why not more companies use value-based pricing is because it requires a set of capabilities that are not obvious. So in my research and in my practice, I have identified four distinct capabilities that companies need to have in order to be excellent in pricing. The first capability is superior customer insight. So you need to understand what customers value, what different segments you have in a market and what the different willingness to pay is of those segments.
So that's kind of the, I call this the house of pricing, that's the base. You need to know before you can actually do. The second capability is pricing economics. So you need to understand the economics, both internally. What are your costs? What are the fixed costs? What are the variable costs? What are the opportunity costs? What is the margin? And you need to understand the economics in the market. How big is the market? What is the price elasticity in the market? What drives demand in a market? So you need to have a good understanding of the economics in a market.
That's no surprise. That's what you would find in every textbook, but again, this alone doesn't lead you to pricing excellence. The third capability is pricing management. And pricing management is the question of when you set your price, how well are you in executing all the functions to actually capture the price till you have the money in the bank account? And one example here that I often use is, we often leave a lot of money on the table through discounting.
And there are only two types of discount, smart ones and stupid ones. So one way to think about pricing management as a capability is, do all the discounts that your customer get make sense or not? And that would show you, that would be a good indicator of whether you are good in pricing management. And the fourth capability is pricing psychology. And that, to me, is the most interesting, but also the most underestimated and underutilized capabilities, so that you understand that pricing is always a question of price perception.