Q&A: How to Forecast When Using Value Based Pricing
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.
Also Read: How to Start Moving a Company to VBP
Mark is a pricing expert who helps companies understand value, how to create it, communicate it and capture it. He has a PhD from U.C. Berkeley and an MBA from Santa Clara University, plus 25+ years pricing experience. As an educator, speaker and coach, Mark applies innovative, value-based pricing strategies to guide growth and increase profits for large and small companies.