Increased sales thanks to value-based pricing

While the potential offered by value selling is much broader in scope, one major benefit of this approach is that providers can enforce higher prices. Setting prices on the basis of the value they generate for customers allows companies to put forward better arguments than their competitors and also to benefit financially.

The defensive role of sales

In practice, however, cost-based and competition-oriented approaches continue to dominate when it comes to setting prices. These approaches mean that sales staff often find themselves adopting a rather defensive position during negotiations and merely attempting to defend the supposedly excessive prices. If quotes are requested by customers, it is usually already too late to make clear the specific additional benefits provided by your own offer. From a provider’s perspective, it therefore makes much more sense to open a discussion at an earlier stage and convince customers of the value offered by your services. In this way, protracted discussions on pricing and competitors can be significantly reduced.

Setting the right course for value-based pricing

For successful value-based pricing, the entire organization must be geared toward the value generated for customers. It is not enough to simply dictate new sales arguments to employees. Instead, the following aspects have to be taken into account:

  1. Fixed-price policy avoids discussions: Unlimited freedom when it comes to pricing can have negative consequences. While the willingness of individual customers to pay can be explored, there is also the risk that price reductions will be granted prematurely. In contrast, a uniform pricing policy encourages the use of arguments about the added value offered by your service, as it is not possible to convince customers by quoting a lower price. It also means that sales staff no longer have the feeling that they have to accommodate customers in terms of price.
  2. Appropriate incentives bring about a change of thinking: Sales staff find themselves under pressure to achieve ambitious sales targets and at the same time follow the approach of value-based pricing. It is not uncommon for them to feel a conflict of objectives. For example, in order to achieve their own goals, sales staff feel forced to offer price reductions, thus making it easier for customers to decide to change their provider. In order to bring about a change of thinking, the success of the sales team should be assessed according to the profits it generates and not sales figures.
  3. Successful strategies incorporate employee knowledge: The knowledge of employees who interact directly with customers is a valuable resource and provides companies with numerous avenues for making improvements. It is therefore worthwhile to involve sales staff in the formation of strategies and pricing policies. At the same time, it is important that the sales team and the technical departments complement one another.

If price discussions cannot be avoided…

Although in an ideal world you would not enter into any negotiations revolving exclusively around pricing, discussions of this kind cannot always be avoided. In order to move the discussions away from pure pricing considerations toward constructive dialog, the following lines of argument can be promising:

  1. Explicitly demonstrate the effectiveness of the offer and the added value it generates: In order to convince the customer, sales staff should list, illustrate and demonstrate the benefits of their product in detail. The objective is to make clear the superiority of your service relative to the offers of competitors. In particular, those benefits that are not offered by comparable products should be highlighted to this end.
  2. Communicate the costs of finding a solution in a transparent manner: Customers are often unaware how their demands can impact the ultimate price of a service. By disclosing this relationship, the buyer can understand which costs its specific wishes cause on the provider side and is given the chance, where relevant, to adjust these.
  3. First convince customers with the service, then discuss prices: Price negotiations should not take place at the start of the purchase process, but rather, wherever possible, be pushed back to a later stage. This means it can be ensured that the customer is sufficiently aware of the benefits offered by the product and that the price is not the only criterion taken account of in the purchase decision.

Initiate dialog with customers by providing them with choice

In order to prevent situations in which companies sell their services below their actual value, customers should be provided with a choice of several options at different price levels. Within these options, the company’s services are combined differently (e.g. a no-frills option that covers 60% of the overall offer as well as an added-value offer that utilizes the full range of services). When a provider offers the option to choose, customers generally refrain from obtaining too many comparable offers from competitors. Instead of blindly targeting the customer’s supposed willingness to pay, an approach like this encourages conversation between customer and supplier with the aim of establishing a price that is fair for both parties. However, it must be noted that not all customers appreciate such choices and too much variety can quickly lead to them being overwhelmed.

Understanding value selling as an overarching approach

Those who merely understand value selling as an opportunity to enforce higher prices have not sufficiently recognized the potential offered by this approach. Focus is placed on a holistic approach that aims to realize added value for customers and set your company apart from the competition. However, value selling only works at a company if all functional areas are involved in order to generate added value for customers together. It is then necessary to implement the services with a qualified sales team and to multiply them for different customer groups.
 

For more insights on this topic, please refer to:
Belz, C., Dannenberg, H., Redemann, M., & Weibel, M. (2016). Value Selling. Schäffer-Poeschel.