The principles of value-based pricing may help drive your prospects’ willingness to pay to the price level that justifies your solution’s value. The process of benefits estimation can be used for quantifying the value of your offering in relation to other offers and alternatives in the market. There are three types of inputs that go into the process of benefits estimation: economic value, relative value, and quantified risks. Let’s explore each, next.
Quantifying the Total Economic Value
The economic value of a benefit or combinations of benefits act as the building blocks in a solution stack. Once estimated, you can add the value provided by each feature or combinations of features to come up with the total. Different from the psychological value, the economic value must be directly attributable to the financial results of a firm’s activities for the top line or the bottom line performance. Some common units are incremental revenue gains, cost reduction & shrinkage, and human capital savings as full-time equivalents (FTEs or man hours) at the resource’s particular unit rate.
Building the Perceived Value Competitively
No buyers are willing to pay for solutions that are new to them. Most buyers shape their value perceptions based on reference price points of competitive or alternative solutions. This adds complexity to the benefits estimation process. The complexity stems from the fact that the value of a benefit has to be calculated in relative terms over what we call the “basis of competition.” Relativity also provides opportunities for building value propositions that stack up well, against the competition. You can position the higher performance of a positive differentiation or simplicity of a negative differentiation, by quantifying its value relative to the competition.
Quantifying the Risks as Well as the Benefits
The quantified value of certain risks that are associated with acquiring a solution should also be included in the marketing and sales processes. Some of these may include the financial and operational risks of:
Not acquiring a solution at all
Late, defective, or sub-optimal delivery
Different levels of onboarding and/or support services
Time to value etc.
While quantifying the value of the risks is quite a difficult task, it is also quite impactful to demonstrate the benefits of your solution.
Don’t Be Late; Use Value-Based Approach Pervasively
Add value-based pricing into your product journey as early in the process as possible. Value-based pricing helps align the entire organization around the benefits and the competitive position of a solution - simplifying your go-to-market execution. Don’t be late, use pricing early and pervasively.
Learn more about implementing value-based approaches into your product management, marketing, and sales - from Pricing Innovations.
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