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Make value your priority

Pricing in business models and the importance of customer perceived value in innovations were on last month’s agenda. This time Andreas Hinterhuber takes these ideas further and considers how a shift to value-based pricing can provide the winning edge.

Pricing in business models and the importance of customer perceived value in innovations were on last month’s agenda. This time Andreas Hinterhuber takes these ideas further and considers how a shift to value-based pricing can provide the winning edge.

I maintain that most industries should be looking to move away from traditional pricing mechanisms often based on cost. I recognise that in any industry there may be products or services where differentiation is not feasible, at least not in the short term, where the move from cost-based to value-based pricing would be impractical or meaningless. Take a supply contract for a ton of standard-grade office paper; this has a basic value to the customer and may vary in terms of delivery times or look and feel, but essentially it is a ton of 80gsm paper. In these or similar cases, after a conscious decision on whether or not to participate in a bid, I suggest reverting to competitive pricing, adjusted to reflect differences in offer quality if relevant.

Changing pricing practices is a true organisational transformation, a bit like changing the company DNA. Pricing is part of the company culture and changing pricing practices requires a change in capabilities, structure, incentive systems and in how the company interacts with customers. Any company aiming to change from cost-based to value-based pricing is well advised to treat this change as a true organisational change management (OCM) programme.

This is an extract from the Finance & Management Magazine, Issue 236, October 2015.

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