(677 words – 5 min)
Pricing, like many fields, is both a science and an art. Many pricing professionals focus on the science side using spreadsheets, big data, data science and market research techniques. We tend to love facts, math and numbers. The science of pricing comes relatively easily to us.
The art of pricing is different. Now we must think differently, as there is more to pricing than just numbers. Let’s split the art of pricing into two parts: the tools and the vision.
Like a painter must choose which tools and techniques to use, a pricing professional must do the same. The painter selects a brush, a type of brushstroke and some colors. The pricing expert decides which strategies and tactics will give the most return. Should they do a conjoint study to determine the value of each product attribute? Should they run elasticity studies to figure out how to change prices? Should they look for the next price segmentation technique? Should they push for a good, better, best product portfolio? Should they raise prices? Should they push the company toward a subscription business model or teach product managers to design products with more value? These are just a few of a pricing professional’s possible projects.
The first part of the art of pricing is making this decision. Pricing people must look across the range of possibilities and estimate (or guess) the effort. They must choose a technique based on an ROI where both “R” and “I” are unknown. The art is determining the direction.
The other portion of the art of pricing is the vision. A painter must see in his or her mind the desired outcome. Then, they can choose the tools and techniques to craft a masterpiece. In pricing, we don’t need to see our own outcome. Instead, we must know the outcome desired by our buyers. In other words, we need to learn what our buyers value—more specifically, how our buyers value our products. This is hard but possibly the most crucial concept in business.
Sure, pricing people should understand the value, but so should product management, marketing and especially salespeople. When people in these roles understand customer value better, they will perform more effectively. Product managers will create products that customers value more. Marketing will speak in messages that capture buyers’ attention. Salespeople will have conversations that resonate. All of this, because we better understand the way our customers perceive our value.
Understanding value is the most challenging part of the art of pricing. I rarely meet people in any role that think in customer perceived value. Step one is realizing that nobody cares about your product. Nobody wants to buy your product. They want to buy a solution to their problem, which gives them a result they value.
That last sentence says it all. They want to buy a solution; this is your product or a product feature. Start by listing the most important features you offer. These are the capabilities you talk about on your web page. You are proud of them, likely for an excellent reason.
Buyers only buy a solution to solve a problem. You created each feature or capability to solve a customer’s problem. Can you write the problem in the words of your buyer? Write it such that when a different buyer hears it, they nod their head and say, “Yes, me too.”
If a buyer has a problem and buys your solution, they expect a result. What is the result a buyer might expect? Try very hard to make this quantitative. This could be a 2% higher average selling price or a 10% reduction in turnover. These are what your buyers are being measured against. These are what your buyers genuinely care about.
Finally, using business acumen and your understanding of your buyer’s business, you should be able to help your B2B buyer calculate the value, or incremental profit, from solving that problem. In the world of B2B, value is measured in expected profit.
Articulating the fields in the four categories of solution, problem, result and value is hard. It requires listening, an open mind, curiosity and business acumen. One set of answers doesn’t apply to every customer, but learning to think this way makes every businessperson more empathetic with their market and individual buyers. It especially helps salespeople have much more productive conversations with buyers, yielding more business at higher prices.
Pricing is definitely part art. Pricing professionals pursue value-based pricing, which implies they must understand value. In learning about value, it becomes apparent that most people in business should understand it too. After all, companies exist to create customer value. Shouldn’t we know what that means?