Sustained profitability lies in understanding sources of value for customers. For that reason, it is only suitable that the value a product delivers to the customer should be the main factor for setting prices. Cost-based and competition-based methods of pricing are outdated and customer-value based pricing is now recognized as the best working approach (Ingenbleek et.al., 2003). Though, it appears that only a minority of companies (17%) have implemented this type of pricing strategy, despite the apparent benefits. One benefit example is that research shows that customer-value based pricing is positively correlated with new product success as there is a direct link with the customer needs (Ingenbleek et. al., 2003). Especially in the current market environment, where it is difficult to have a differentiating position, obtaining such an advantageous pricing position can be crucial to help you go a long way.
So, why do companies resist?
A general difficulty of customer-value pricing, relative to other pricing strategies, is that it is hard to find relevant data. Customer-value is not directly measurable, therefore this strategy requires intensive communication which costs time and money. Five additional obstacles at various levels of implementation have been identified. Based on both qualitative and quantitative research the, the reasons for resistance have been unraveled.
The main difficulty perceived by practitioners is defining the product value. If companies do not know the value of their products, how can they know what to charge the customers? This can be overcome by defining value based on a reference value (deducted from the best alternative’s price) plus the added value from the offered differentiating components (premium). The value assessment could be expanded by (a combination of); expert opinions, focus group assessment, in-use observations and product rankings.
When a company has overcome the hurdle of value assessment, they have to effectively communicate this value to its customers. The modern market overflows customers with advertising, which obstructs effective communication. Getting attention and conveying the intended message to trigger the desired response requires creative tactics. The appropriate levels of sophistication to improve communication include; communicating the product features, the customer benefits and the accordance with the customer needs.
Market segmentation, targeting and positioning have created an issue that could not be resolved by the established “four-P’s” focused marketing theory. When implementing customer-value based prices, the basis for segmentation are the needs of the customer. Needs-based market segmentation expands the variety of market segments by adding segments that are less restricted by the importance of price.
Sales force management also experiences difficulties at the implementation level of customer-value based pricing as they feel pressure to minimize premiums to reach targets, causing leakage of value. To achieve long-term goals, sales force management has to be controlled by clear guidelines regarding sales discounts, remuneration systems, training, development and monitoring.
At last, senior management support has to be established in order to have a successful customer-value based pricing system. The necessary support can be obtained via lobbying, networking or bargaining. In a supportive environment, the top-down pressure is relieved which will also contribute to a better functioning sales force.
Concluding, at many levels of considering customer-value based pricing a problem could arise which hinders the implementation of this pricing mechanism. Though, all obstacles can be overcome by the presented solutions, which results in a company that has a satisfactory position to leverage customer-value pricing.
Backward-looking to these findings, it would be interesting to review the value of these solutions by having a follow-up study and ask whether these solutions have been taken to use and if and how this in practice actually holds as a roadmap for implementing customer-value pricing. To me, the steps feel like an “easier said than done-method” and putting them to practice with the result of obtaining the desired outcome does not seem that feasible to me.
Hinterhuber, A. (2008). Customer value-based pricing strategies: why companies resist. Journal of business strategy, 29(4), 41-50.
Ingenbleek, P., Debruyne, M., Frambach, R. and Verhallen, T. (2003). Successful new product pricing practices: a contingency approach”. Marketing Letters, 14(4), 289-305
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