When value-based pricing doesn't work
The most common reaction we get when asking a potential client how they price their solution is to resort to the idea of value-based pricing. Value-based pricing is undoubtedly a logical place to start. You are selling something to someone to whom it has a certain value. Therefore, it makes sense that the price is linked to the value they will be able to derive.
It is also of great benefit to the seller to understand the solution’s particular value to each potential customer, although this understanding is not always necessary nor sufficient to make a sale.
However, sticking blindly to value-based pricing can hinder a sale. Whilst it is important to understand the value to a sales prospect, if they start to get the impression that with every benefit they reveal you are going to increase the price accordingly, you are less likely to be able to have the open discussion about their business that would facilitate a closer working relationship through the sales process.
On a similar note, your customers want to feel that if their circumstances are in some way exceptional then they should be able to get exceptional value. From your customers’ point of view, they purchase a product or service in order to improve their service to their customers. If your other customers – their competition – can derive the same relative value as they do then you lose the bargaining chip of selling competitive advantage.
Moreover, value-based pricing assumes your pricing objective is to derive a ‘fair’ value or a consistent ROI in every case. Your strategic pricing objective should be based on the number of customers you have, the state of the competition, your cash flow, the competence of your sales team, and many other factors.
If you are trying to win your first customer in a new territory – or even your first customer entirely – you are not usually in a position of strength. By insisting that you take a fair price at that point, you risk losing a sale on price when your ultimate objective was nothing more than gaining a proof point in a new market.