You’re Pricing All Wrong: How to implement value-based pricing
If profit is at the heart of pricing, the question becomes what would you do to increase your margin while maintaining or enriching your customer experience? Would you consider a different pricing model? If so, would value-based pricing be an option for you? If you are unfamiliar with value-based pricing let me explain what I mean.
Value-based pricing according to Wikipedia is “A pricing strategy which sets prices primarily, but not exclusively, on the value, perceived or estimated, to the customer rather than on the cost of the product or historical prices.” Now I know that’s a stretch from what we as government contractors have been taught. But think about it, if you can increase your revenue, hourly rate, or output without increasing your indirect costs, wouldn’t it be worth it? Let’s face it, we are all looking to increase perceived value for our customers, otherwise, why are we in business? Now don’t get me wrong, “value” is in the eye of the beholder” BUT, if both a buyer AND seller can benefit from maximum outputs and minimized costs, don’t you think it’s worth exploring?
Now if you think it’s worth looking into, let’s cover the basic premise of how you can apply this pricing methodology to your business. So stay with me as I give you a few examples of how you can begin to engage with this methodology, plus I will give you some tips on how you can ensure success.
So let’s begin with some basic questions.
1. How can value-based pricing work in my business? For starters, value-based pricing is based on the premise of defined outputs. Both the customer and the provider has to have identified solid defined metrics. Each party should be in agreement on what those outputs will be as well as when the outputs will be delivered. Work can’t be ambiguous or undefined since agreed upon value is in the eye of the beholder.
2. As a government contractor, how can I use value-based pricing to my advantage? One of the key factors for success as a government provider is to understand the end game for your buyer at multiple levels. The value-based pricing model works to advance and satisfy the mission of the buyer, while also proving to reduce costs over time; a sweet spot for the provider. With defined customer outcomes, the realized benefit to select vendors who can show value, results and price reductions is much more attractive in their eyes. After all, the end goal should be to meet critical agency missions AND save money for the taxpayer.
3. What is the success triggers for effective value-based pricing? As I have mentioned before, narrowing expectations for customer outcomes is a must. But also having a deep understanding of your customer is also at play. This is where customer intelligence is the central focus; as customer relationships are critical to this type of pricing model. Your solution has to be in alignment with customers expectations and that will take the time to develop. You are aiming to become the buyers trusted adviser and partner. And although teamwork is vital to a successful model, most of the time your customer should have more skin in the game than you, the provider.
Here’s a good example of value-based pricing at it’s best: Some of the top government consultants charge between $19K-$26K to prepare a GSA Schedule contract proposal package. Their pricing for these services is based on value, not costs and the costs of actually preparing a GSA Schedule contract proposal is typically about a third of the price. But the outcome, as the result of working with the government consultant, far outweighs the price tag of the service. A reputable government consultant with a solid track history will provide you with an outstanding proposal that leads to a pre-negotiated contract vehicle, which is well worth its weight in gold.
So where’s the VALUE?
Well, with the proper messaging the consultant assures you of their best service, sells you a vision of their stellar proposal process, gives you access to top-notch professionals and clearly defines the proposal outcome — a contract that can potentially bring millions to your doorstep. You as the decision-maker come away thinking about future contract earnings and other golden opportunities. You also know the potential earnings more than make up for the cost of paying for preparation services. It’s value-based pricing at its finest!
Of course, this model is not for the faint of heart and there are some risks involved, but the payoff can be great. The real challenge I believe with implementing this type of model is the heavy investment of customer intelligence gathering on the front-end. Plus since most government pricing decisions are made based on historicals and competitor pricing, how can you successfully implement this strategy and satisfy customer requirements all while trying to get them to move away from old habits? The biggest challenge will be to get your customers to think differently about how they purchase. But, if government decision makers are truly are interested in making purchasing decisions based on outcomes AND significant cost reductions over the long run — they need to consider optional ways of doing business that in the end ultimately save taxpayers money.