Boost your Pricing Power with Strategic Value Selling
19.03.2024
In a dynamic environment, many companies are faced with increasing cost and price pressure. However, companies which offer unique added value in their customers´ eyes still manage to achieve above-average profits. They are successful, because they have 'pricing power' - their customers are prepared to pay higher prices and don´t immediately change providers when prices are increased.
Pricing power can be systematically built through Strategic Value Selling. Strategic Value Selling goes beyond 'classic' Value Selling. Starting with a company's business model, it considers the entire marketing and value creation process that precedes the sales conversation. Thus, the company creates a basis on which the salesperson can build to develop unique solutions with measurable added value together with their customer partners.
Strategic Value Selling comprises the following core steps
Continuously evolve your business model as a foundation for value creation
A company's business model is the foundation of its pricing power. A business model describes how value is created and monetized for defined target groups. The Swiss medium-sized company Bossard has continuously evolved its business model: From a supplier of 'interchangeable' C-parts, the company has transformed itself into an 'indispensable' service provider that optimizes its customers' processes. This measurably reduces their 'total cost of ownership'. Based on the resulting savings, Bossard implements value-based pricing.
Segment customers according to their needs
Customer segmentation is a key component of a business model. Segmentation based on customer needs and willingness to pay is best suited to meet the requirements of different customer groups and to optimally serve them. BASF segments its customers according to their willingness to pay and the intensity of the relationship. On that basis, the company has defined 6 segments that are served efficiently and effectively with different interaction and pricing models.
Develop customer-specific value-added offers
Specific 'benefit bundles' are developed based on the customer's requirements and willingness to pay. The bundles create measurable added value for the customer and a unique position for the provider. The solutions often go beyond physical products and include classic services such as maintenance contracts, data-driven services (predictive maintenance) and innovative pricing models (pay-per-use). However, despite all the technology, we should not forget that the provider's brand and the personal relationship (trust) with customer partners can make the difference from the customer's point of view.
Quantify and document added value in financial terms
'Pricing power' is based on 'value power'. Companies must be able to financially quantify and document the added value they deliver. SKF offers a range of data-driven services called 'Rotating Equipment Performance' to increase the overall efficiency of its customers' rotating equipment. Thereby SKF helps its customers to identify potential risks at an early stage and prevent production losses running into millions. In published success stories, SKF quantifies and documents the financial added value achieved for the customer.
Share the added value through the price
The price paid by the customer should correspond to the value delivered. This works provided that the added value can be financially quantified and that the customer accepts the calculation. The rule of thumb for pricing is that the added value should be shared with the provider. For example, if the customer saves €100,000 through a better solution, then the provider should 'recoup' 50% of this - i.e. €50,000 - through the price. The other 50% remains with the customer.
Qualify and incentivize the salesforce for value-based selling
Sales is the spearhead of a company's value creation – its task is to create innovative added value with individual customers and to charge prices that correspond to the value. Tools such as software-based value calculators help to shift the customer conversation from price to value. In addition, incentivizing the salesforce by profit margin - rather than only by sales volume - leads to lower discounts and a direct margin improvement.
Companies which introduce Strategic Value Selling must first convince their own sales force before winning over the customer! Therefore, sales management and the sales force must be closely involved in the transformation process right from the start. Once the foundation has been laid, a step-by-step roll-out can take place after successful piloting.