1
What is Value Based Pricing
And why should I care.
Sander Veraar
www.productcampsg.com
28 September 2013
2
Introduction
Sander Veraar
Product Manager
Contact
sg.linkedin.com/in/sanderveraar
twitter.com/sanderveraar
Verizon Ente...
3
• What is a price?
• Common pricing methodologies
– Cost Plus
– Competitor Based
– Project Based
• Who sets your pricing...
4
What is a Price?
Price
[Definition] The amount of
money that has to be paid
to acquire a given product.
Insofar as the a...
5
A price communicates a value to a customer
No, Really, What is a Price?
A Bottle of Water
S$0.45
You can buy this for
S$...
6
When considering value, perception can be as important as reality.
What Type of Value?
@cnet Gold iPhone 5S sells for $1...
7
• Price is the monetary value of a product
• Price is a means to communicate value and quality
• Price is a measure of d...
8
Common Pricing Methodologies
Cost Plus
• At its simplest, cost-based pricing
is based on our assessment of
the total cos...
9
Common Pricing Methodologies (cont.)
Project Based Pricing
• Project Based Pricing is a
variation on Cost Plus where the...
10
Who Sets Your Pricing
Cost Plus
Your Accountant
Sets Your Pricing
Your Competitors Set
Your Pricing
Competitor Based
Yo...
11
Value-based pricing is about pricing on differential value.
• Differentiation describes any aspect of our total custome...
12
Finding Differential Value
Revenue gain
Cost reductionEmotional
contribution
Value to
the Customer
Figure 1, “Value Tri...
13
Emotional Contribution
Why Pay $10K for a Gold iPhone 5S worth just $649?
Image source: CNET www.cnet.com
14
• A value-based price is (1) designed and communicated such that (2) all
parties understand, recognize, and accept the ...
15
Who Sets Your Pricing?
You negotiate a price with your customer based on an
analysis of the customer’s value-added proc...
16
“Tying pricing to value allowed a network client to boost the price of
a new product by nearly 25 percent” (McKinsey)
•...
17
• “Product Management is above all else a business function, focused on
maximising business value from a product” (mind...
18
• A value based pricing strategy involves your entire organization. It needs
a company wide initiative to build value i...
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ProductCamp Singapore #1 - What is Value Based Pricing

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“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.

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  • ProductCamp Singapore #1 - What is Value Based Pricing

    1. 1. 1 What is Value Based Pricing And why should I care. Sander Veraar www.productcampsg.com 28 September 2013
    2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 13 Emotional Contribution Why Pay $10K for a Gold iPhone 5S worth just $649? Image source: CNET www.cnet.com
    14. 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. 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. 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. 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. 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

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