“An introduction to Value Based Pricing” which I presented at the first edition of Product Camp Singapore on September 28th 2013. I prepared this deck to introduce common pricing methodologies based on my own taxonomy, to discuss the basic principles of value based pricing and to provide some tactical pointers. The idea is to get the audience to think about how their pricing assumptions impact the way they conduct business.

1. 1
What is Value Based Pricing
And why should I care.
Sander Veraar
www.productcampsg.com
28 September 2013

2. 2
Introduction
Sander Veraar
Product Manager
Contact
sg.linkedin.com/in/sanderveraar
twitter.com/sanderveraar
Verizon Enterprise Solutions
Premier partner for secure IT,
communications, networking and
mobility solutions delivered to large
and mid-size businesses and
government agencies globally.
Experience
7 years in Product Management
and 5½ years in Pricing

3. 3
• What is a price?
• Common pricing methodologies
– Cost Plus
– Competitor Based
– Project Based
• Who sets your pricing?
• Why value-based pricing?
Agenda

4. 4
What is a Price?
Price
[Definition] The amount of
money that has to be paid
to acquire a given product.
Insofar as the amount
people are prepared to pay
for a product represents its
value, price is also a
measure of value.
Source: encyclopedia britannica
http://global.britannica.com/EBchecked/topic/475733/priceS$0.45
Image source: www.goshopeasy.com

5. 5
A price communicates a value to a customer
No, Really, What is a Price?
A Bottle of Water
S$0.45
You can buy this for
S$0.45
Image source: www.goshopeasy.com

6. 6
When considering value, perception can be as important as reality.
What Type of Value?
@cnet Gold iPhone 5S sells for $10K
on eBay, worth just $649
Source http://news.cnet.com/8301-13579_3-57604294-
37/gold-iphone-5s-sells-for-$10k-on-ebay-worth-just-$649/
For Sale! 1984 Ferrari Mondial
Quattro - Asking Price $2500
Fix-her-up. Needs some work. Great
Value! (excl. CEO)
Image source: www.carsales.com.au

7. 7
• Price is the monetary value of a product
• Price is a means to communicate value and quality
• Price is a measure of differential value
• Price can influence a customer’s perception of value
Summarizing What is a Price?

8. 8
Common Pricing Methodologies
Cost Plus
• At its simplest, cost-based pricing
is based on our assessment of
the total cost we incur in
manufacturing a product or
delivering a service.
• It is the default pricing method
adopted by most companies
• It is usually applied in conjunction
with competition based pricing.
Competitor Based
• In competitor based pricing, we
compare the features and
specifications of our product with
those of the competition.
• Based on this comparison we
make a judgment about how the
product or service should be
positioned and priced.

9. 9
Common Pricing Methodologies (cont.)
Project Based Pricing
• Project Based Pricing is a
variation on Cost Plus where the
assessment of the total cost we
incur is based on manufacturing
a product or delivering a service
for a specific customer.
• Project Based Pricing is used
when the product or service
required by the customer is well
defined and the process to
provide it is well understood.
Outcome Based Pricing
• Outcome Based Pricing is a
variation on Project Based Pricing
where we are paid based on the
cost and the quality of the actual
work performed.
• Outcome Based Pricing typically
acts as a risk sharing mechanism
• Outcome based pricing is used
when the customer can only
describe the end result but
cannot describe the means or
processes to deliver this result.

10. 10
Who Sets Your Pricing
Cost Plus
Your Accountant
Sets Your Pricing
Your Competitors Set
Your Pricing
Competitor Based
Your Customer Sets
Your Pricing
Project Based
Image source: www.gettyimages.com

11. 11
Value-based pricing is about pricing on differential value.
• Differentiation describes any aspect of our total customer offer that is
different from that of the competition, and crucially, that is recognized and
valued by the customer.
• Our product or service may well be different from the competition, but
unless it delivers real value that the customer can identify with,
understand, acknowledge, and be willing to invest in, then it is merely a
point of difference – and not differential value.
So why Value Based Pricing?
Adjusted from H. MacDivitt & M. Wilkinson “Value-Based Pricing – Drive Sales and Boost Your Bottom line by Creating, Communicating
and Capturing Customer Value”. Kindle Edition

12. 12
Finding Differential Value
Revenue gain
Cost reductionEmotional
contribution
Value to
the Customer
Figure 1, “Value Triad”, from H. MacDivitt & M. Wilkinson “Value-Based Pricing – Drive Sales and Boost Your Bottom line by Creating,
Communicating and Capturing Customer Value”. Kindle Edition

13. 13
Emotional Contribution
Why Pay $10K for a Gold iPhone 5S worth just $649?
Image source: CNET www.cnet.com

14. 14
• A value-based price is (1) designed and communicated such that (2) all
parties understand, recognize, and accept the (3) distinctive worth of the
products or services purchased in the transaction and (4) participate in
optimizing the gains created by their use.
Take note that:
(1) A price is specifically designed for each individual transaction
(2) Multiple parties means the buyer, the seller (you) and other stakeholders
(3) Distinct worth means it is objective and measurable (needs reference object)
(4) All parties participate in optimizing the gains (win-win)
Defining Value-Based Pricing
Definition from H. MacDivitt & M. Wilkinson “Value-Based Pricing – Drive Sales and Boost Your Bottom line by Creating, Communicating
and Capturing Customer Value”. Kindle Edition

15. 15
Who Sets Your Pricing?
You negotiate a price with your customer based on an
analysis of the customer’s value-added processes.
Value Based Pricing
Image source: www.gettyimages.com

16. 16
“Tying pricing to value allowed a network client to boost the price of
a new product by nearly 25 percent” (McKinsey)
• “A leading maker of network equipment was bringing an innovative new
product to market in the midst of a broad industry slump.”
• “The company called McKinsey to help put in place a “value-based”
pricing structure that would better align the price of the product with the
benefits it generated for customers.”
• “We worked with the client to identify all the potential sources of economic
benefits to customers from using the new product and compared them to
the next-best alternative from competitors”
• Source http://www.mckinsey.com/Client_Service/Marketing_and_sales/Case_studies/Pricing_network_product
Application

17. 17
• “Product Management is above all else a business function, focused on
maximising business value from a product” (mindtheproduct.com)
• “Good product managers think in terms of delivering superior value” (Ben
Horowitz)
• “As a product manager you need to be able to explain your product's
business value” (Forrester.com)
Why Should I Care?

18. 18
• A value based pricing strategy involves your entire organization. It needs
a company wide initiative to build value in all parts of the business.
• It calls for detailed knowledge of your customer’s industry and business.
You need to build this understanding prior to the first customer meeting.
• Not every customer will acknowledge the real worth of the value you offer.
You should be prepared to walk away rather than to compromise.
• Each transaction is unique.
• Your relationship with your customer is central to all transactions.
Closing Remarks