In a recently conducted survey by Ibbaka, we asked 170 individuals responsible for pricing decisions across different industries, what they believed to be the main pricing challenges faced by their organizations. 60% of respondents said they feared they were leaving money on the table, while 41% said they were discounting more than they should.
Do these pricing concerns sound familiar? In this blog, we will discuss the ways in which pricing strategies commonly fall short, resulting in the inability to effectively capture customer value. We will also consider best practices to mitigate these risks and to optimize pricing.The Value Cascade (figure below) by Tom Nagle and Georg Müller is a new framework introduced in the Sixth Edition of The Strategy and Tactics of Pricing. It identifies different stages in the customer value creation and pricing processes that can create a price-value gap. Each of these gaps make it difficult for organizations to maximize returns through pricing.
Source: The Value Cascade: Strategic Pricing Requires Effective Management of Both Value and Price. Copied from The Strategy and Tactics of Pricing - A Guide to Growing More Profitably, Sixth Edition (p. 11), by T. Nagle & G. Müller, 2018, New York, Routledge.
Let’s discuss some best practices on how to reduce the price-value gap, maximize returns and not leave money on the table!
There are no shortcuts to effective pricing. Good pricing decisions always start with robust market segmentation. A product/service offer is meant to address a customer need or pain point. There will be a gap between the potential value of your offer and the actual value to customers, because it is very difficult to solve any problem “perfectly.” However your aim should be to minimize this value creation gap by creating differentiated value for your target segment(s).
If you are all things to all people, you will not be able to close this gap. Market segmentation helps identify target segment(s) that you, as an organization, are best suited to serve. You can close part of the value creation gap by addressing the target segment(s)’ needs better and/or differently than their next best competitive alternative . This is the foundation of value-based pricing.
Perceived Value: Customer value perception plays a key role in determining how much of the differentiated value created can be effectively captured through fair pricing. You will only be able to maximize returns from your offer if your customers perceive your offer to be valuable. If you have a differentiated offer, but your customers do not fully understand the differentiation, it takes away from your pricing power. Your organization should proactively shape customer perception by effectively communicating the value of your offer to your target customers.
Pricing Design: Pricing should capture a fair share of the customer value created. Even when charging a premium for a value-added, differentiated offer, the price should not aim to recoup the full value you create for your customers. Your price should leave a consumer surplus - that is, the customer should feel they are getting more value than the amount they spent. So, there will be some inevitable price-value gap here.
Also when designing your pricing, if you have a tiered pricing structure:
You should track regularly to ensure each tier is effective in its assigned role. Usually, within a multi-tiered pricing structure, the target pricing tier is framed by lower and upper tiers.
Make sure the the lower tiers are providing the correct framing and guiding customers towards your target or optimal pricing tier. If you are unable to up sell from the lower tier, then chances are either:
OR,