Q&A: How to Forecast When Using VBP

Question:  Mark, moving from a traditional pricing model (say, cost +) to a value-based model can bring challenges in sales forecasting because it is moves away from numbers sold x average transaction value approach, especially for the finance team. Any wise suggestions on how you address their fears? David

Answer:  David, first my opinion.  Finance people who are worried about this are lazy.  Almost by definition, shifting from cost plus to VBP (Value Based Pricing) will increase revenue and profit dollars.  Here’s why I say that.  Let’s say our price, determined using cost plus, is $900.  We know we can sell 1000 units at that price so we forecast $900,000.  Now, if you move to VBP, which means charge what your customers are willing to pay, some of those 1000 buyers would have paid more.  So revenue should be higher.  Everybody had WTP (Willingness to Pay) of at least $900 because that’s what we forecast before.  Any deals we sell at below $900 should be additional above the originally forecast 1000 buyers.  It’s incremental.

If I were working with a finance team like this, I would suggest they forecast as before, but then commit to them the blended margin or blended ASP (Average Selling Price) will be at or above their cost plus price.  That way you can sell at higher prices and accept deals at lower prices, increase revenue and profit dollars, while giving finance the margin percentage they are worried about.

Here’s the big worry.  Once we allow salespeople to negotiate, they won’t negotiate well.  Margins will go down.  This is a real fear.  You will want to put carrots and sticks in the sales incentive plan.  Give them more money if they sell at higher prices.  But make it painful for them to sell at lower prices.  Also, don’t forget to give them the training, tools and knowledge they need to be able to sell value.
Winner of the Answer of the Week – Why, when you present your price, do buyers push back?an-example-of-the-power-of-losses-over-gains