Note down your answers as we would like you to re-take this quiz after you have read the article.
Q1. VBP is offering ‘value products’ i.e. cheaper products [True / False?]
Q2. VBP makes sense only for truly differentiated products [True / False?]
Q3. VBP can be defined only when developing / upgrading products [True / False?]
Q4. VBP is less effective when the competition is high [True / False?]
Q5. VBP is developed only by the Product and Marketing teams [ True / False?]
Q6. Once you have developed VBP you can use it with all your customers [ True / False?]
WHAT is Value-Based Pricing (VBP)?
Value-based pricing is an approach to determine the price of your product based on the value it provides to your customers. A very simple example is from the B2C world – a retailer will sell a bottle of water or a pack of crisps a higher price on the top of a mountain or in a tourist hot-spot, vs. its price in a local supermarket. In this example, the consumer will pay a premium for the convenience of buying the water or the crisps in those locations. We use this example to highlight an important aspect of VBP, that the value you provide to a customer is not just based on the specs and features of your product. After all, it is the same water that is being priced differently.
WHY should you consider VBP?
VBP helps B2B companies to capture and sustain higher margins. This is because VBP helps you to:
a) Differentiate your product / service – so you are not just competing on price.
b) Earn a fair share of the value that your product / service provides your customers – so that you can improve your margins. On the other hand, VBP can also help you to manage your cost-to-serve by recalibrating the value that you deliver.
c) Strengthen customer relationships – so you can improve customer retention and your share of wallet.
WHEN should you develop VBP?
Pricing is a continuous process as you need to adapt to the dynamic nature of your market, competition, and customer’s needs. If your organization has never done VBP, then you can start the VBP exercise at any time for your existing portfolio. Developing and testing VBP typically needs several weeks – so we would recommend starting the VBP process as soon as you can. If you are launching a new or an updated product or service, then you should develop VBP in the product development phase. B2B companies typically have an annual price review process. That process should also include VBP review.
WHERE should you apply value-based pricing?
You can use VBP for differentiated as well as me-too products and services in your portfolio. However, if you are starting with VBP for the first time, then we would recommend choosing the most differentiated products. Building VBP requires an in-depth understanding of your customers and your competitors – this requires significant time and effort. Thus, after shortlisting the product for VBP, we would recommend choosing your largest customer segments and your largest markets for the in-depth analysis required to develop VBP.
WHO should develop VBP?
Product or Marketing teams alone cannot deliver VBP. Successful VBP requires engagement of all product and commercial roles in the organization such as Product, Marketing, Sales, Customer Service – and the engagement of your customers. This level of cross-functional engagement is necessary to understand the real and perceived sources of value. When was the last time you had a cross-functional team provide input for price setting?
HOW should you develop and implement VBP?
VBP is as much about a change in mindset as it is about the underlying mechanics of setting the price and the sales skills needed to achieve that price in the market. In our experience, the most important first step in VBP is to address the mindset change, so that the entire commercial organization starts to think about selling value instead of just selling a product.
Companies with most successful VBP initiatives invest the time upfront to build a unified view across their commercial functions on some fundamental questions like ‘What is Value?’ and ‘How do we quantify Value?’ Answers to such questions are very specific and unique to each B2B company depending on what it sells, where it sells, who it sells to and how it sells. To build such a company-specific view on VBP, we organised a cross-functional 1-day workshop for one of our clients. The workshop had 20+ participants, not just from their Product and Marketing teams, but also from their Sales and Customer Service teams. In the interactive workshop, the participants learned the VBP concepts, and then applied it to build the VBP outline for their products and services. This company-specific view of VBP served as the foundation for the company to then systematically quantify value and set the VBP.
Practical next steps…
Finally, don’t forget to re-take the quiz. Did you find a difference in your answers before and after reading this article? What did you learn? Are you curious to know the answers to all the questions – and the rationale for those answers?
If you have any further questions or if you want to share your feedback on the quiz, please contact us at email@example.com
About the authors:
Kedar Gharpure is the Director of B2B Growth Consulting Ltd. He has served business heads of several Fortune 250 and Private Equity owned B2B companies on growth strategy and commercial transformation.
Vidya Ranade is the founder of Decodexis, a company that provides bespoke analytics and consulting services to clients in marketing & sales, operations and R&D,