Wednesday, December 15, 2010

What is Value Based Pricing and Value Based Selling ?

What is Value Based Pricing and Value Based Selling ?

Value based pricing takes into account the perceived value of an product or service as seen by a customer. What will be the incremental benefit I will receive from this Seller's product or service. Value based pricing converts that incremental benefit into a marginal price differentiation beyond cost plus or the cost of their competitor which cannot provide those incremental benefits. It reflects a trade off between benefit gained & price paid.

Value pricing is simple. You take the parameters which will be perceived by the customer to limit price and then see if you can build a case to change their perception. It is important to remember that all value lies with the customer. Value is not what you put into your products or services, but what your customer gets out.

Value based selling helps extend the size of the incremental benefit perceived & accepted by the customer. Suppliers will seek to Value Based Sell to potentially increase revenue without increased costs or to gain an advantage by showing customers that the Supplier really understands their business and is delivering value for money.

Suppliers will avoid Value Based Selling to avoid potentially high "cost of sale" due to the need to invest in understanding the customer's business wasted pre-sales effort

1. PROSPECTING (Who/where are the potential customers who need the benefits my product or service will provide ?)

2. QUALIFYING (Can I deliver to meet their expectations. Do I feel that they will be willing to pay the incremental costs to get the benefits I can deliver ?)

3. BIDDING (What is going to unique about my Bid ?) How can I differentiate my bid from the others to give me a competitive advantage.

4. DELIVERING (Now that the customer trusts me, where else can I add value and sell more products and services ?)

5. POST-DELIVERY (What value has customer gained ?) Do I understand the real benefits so I can use them in marketing to other customers using things like customer testimonials.

Companies make certain acquisition decisions infrequently. Most will not have the real expertise to allow them to understand what is needed and what provides true value. Many use questionable information to make decisions. If someone can convince them that they are receiving value and that savings will accrue, in most cases they will be willing to pay a premium price. Customers may be less concerned about the price of an item than the affect that item will have on the cost of their operation. If I can buy an item that will eliminate $100,000 in annual operating expenses and have a pay back period of 18 Months I could easily lose sight of the fact that I may be paying substantially too much for the item - I'm blinded by the bigger value received.

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