Episode #0095 - Can value based pricing go wrong?

In many of our podcasts, we talk about value-based pricing. How it is the best thing since sliced bread and how everybody should be doing it, or moving towards it.

 

But in today's podcast, we're going to answer a question we received and that is, can value-based pricing go wrong?

 

So the simple answer here is yes, it can go wrong.  I'll give you some context, some scenarios where I've seen it go very wrong. Often it's done in businesses that are very cost plus. They've got a history of cost-plus. They're quite traditional businesses. They're used to doing everything cost-plus. Then they read about or have been consulted to implement value-based pricing because this will lead to more profitable results, revenue growth. So they get excited by that. Then they start implementing. But fundamentally the culture is an entrenched cost-plus. It's very difficult to crack that just like overnight. You can't because often that comes with a commodity mindset. No matter of spin on value-based it will really penetrate that cost-plus code. Because that's taken a number of years really, in the legacy, the history of the business. That's what people are used to doing. When people are used to something it's very hard to stop those habits even if somebody has told them that they're no longer helpful. Or even impact the bottom line. So I think scenario one would be it can go implementing value-based pricing can go terribly wrong. When you think you can do it overnight. The business is, is very traditional, slow-moving and used to cost-plus pricing.

 

I think I'd summarise that. I'd say that if something's very difficult to do, and costs and value-based pricing is very difficult. It really is a transformational change. If something is difficult when it is implemented perfectly it looks amazing. But yeah, when some things are that difficult, there's a very high chance that your implementation will be vast. I'd love to be a ballet dancer, the ball show Ballet but let's be honest, I don't think the chances of it occurring are very low. I think you have to look at a real true value-based pricing is chalk and cheese for what most companies do. It is difficult. I think on this podcast, we always say it's a journey. Do you ever get there? We're not trying to hold it out like a never-ending over the rainbow sort of thing.  But it is one of those journeys and obviously, every step you take in that direction is a good step. But you have to put steps will have the next you can't jump to the destination. You can't just send out an internal memo and say we are now value-based pricing. We've reached Valhalla and that is it. It's a journey and you have to logically keep stepping along without rushing. Don't throw away the structures that are working for you. That is paying your bills that are delivering revenue. That is keeping your Salesforce in the field. Those sort of things you need to keep them going. Then progressively enhance them and move them towards something. You don't just declare, pull up stamps in a cricketing term and say we are we're now value-based pricing. Because when you do that, the high chances that all the structure systems process that you had in the past. Will they fall apart? Potentially.

 

Okay, so scenario two, where I've seen value-based pricing go terribly wrong. Okay, so the first scenario there was when a consultant has come in and said this is the best thing since sliced bread. Why don't you implement now in a cost-plus culture? Now, this scenario is when a business similar to the first cost plus used to that sales discretionary pricing all of that stuff happening. But they decide it could be through an executive smart executive in the business or maybe a consultant suggesting it. That they should have a pricing team come into the business and implement value-based pricing. All the while can zoom away with that, implementing this roadmap and not really fixing the fundamental problem here which is the rest of the company building capability across departments. Because as we all know, if we know about pricing now, pricing isn't just something that the pricing team does. It's something that all departments should understand and often are involved in. Like category managers, often are involved in pricing decisions. Sales managers and their teams often talk about value and pricing with customers every day in fact. An executive signing off on strategies for pricing. Even HR incentivise teams to build more profitable revenue growth. Everyone's involved in pricing. So my point here really is you can't really expect a pricing team to do an excellent job with value-based pricing. Fortunately, yes, they can forge a path and show good examples. But they can't really do it for the business. Everybody needs to get involved. Everybody needs to know how they fit into pricing. And if they don't, the poor pricing team turns into an object of ridicule, or even that they're blamed for implementing what is actually best in class. But it all falls apart. Doesn't get the results that were expected. Because nobody else is actually implementing their advice. So that's a fiasco that I see time and time again. I'm really would hope that we can all avoid it. But that's scenario two why value-based pricing can fail.

 

I think I'll reiterate that one. I'm a big believer that people do what they're incentivised to do. Everyone in any job you've ever had might have your job description. But fundamentally, you really know what you're supposed to do to get paid or to get your bonus. And if you implement any business strategy badly. You'll have people pulling in different directions. You'll have people who are incentivised to protect their silos, to protect their turf. If you try to move to a value-based pricing system without actually realigning goals, incentives packages, what are people looking for? Is it margin? Whatever it is without that aligned you're inevitable as Joanna said, you will have people pulling in different directions. And if that increases, if this implementation is worse than the old system. The old system may have been an imperfect pricing methodology. But at least people might have been pulling in the same direction. In this new one, they're pulling a different direction. So you certainly could go backwards. One final thing when we started this podcast, I thought I was going to talk about how a business had an inferior product. You could do worse through value-based pricing. If your value was actually low, and then I actually thought about that. I don't think that's the case. I would have said that if your company produce a low-quality product moving to value-based pricing. Or you're actually capturing the value of that product. In theory, your prices will be lower or probably lower than the market average. I actually don't think that will be worse than the cost-plus or any other methodology. Because theoretically the market and the customers will know that. If you're trying to charge more than what it's worth, they’ll quite quickly tell you or move to a competitor. So I don't think in that scenario, this methodology pricing would have a worse outcome simply based on quid pro quo. I don't even know what that means, but that's Latin I think. That sort of thing I don't think somebody changing the pricing system would decrease profitability in that scenario. I think generally the market tells companies by pushing them into problems before they really make them jump into the hard work of moving to value. So I think yeah, reiterating, it's a people issue, its dynamics, it's setting up the systems, it’s making sure the team are pulling in the same direction. How is that tug of war team pulling in one direction? Because otherwise, it's not going to move.

 

I was thinking along the same lines as you. Is it the right method for maybe for commoditised industries where products are very similar? There's a price war blah, blah. But then I was thinking the problem isn't that. It's probably if you implement value-based pricing in those industries, or even I've seen this in startups. You either over overestimate or undersell yourself, either or doesn't matter either scenario. You just leave it and you just leave that assumption there without testing it. And I call that set and forget pricing, which is another disastrous sort of scenario for when value pricing goes wrong in businesses. Because value-based pricing changes. It changes because it's highly connected to the market, to your customers. So we know that the world around us changes. So if you then implement a set and forget price and that could be with cost-plus or even value-based pricing. And you don't double-check and cross-check and validate your assumptions, test and trial, tweak and all of that sort of stuff which is a more scientific approach. That's not value-based pricing but you need that scientific approach to test your assumptions on value. That's when I see another scenario of when value-based pricing can go wrong. When you just think okay, I'm not going to invest in dedicated pricing resources I think my perceived truths about the market are just fine. Because I think the markets like this, therefore it is. Because I know as a leader that this is true about the market, inconsistencies in how my sales go to market with that strategy is their issue, not mine. So those sorts of scenarios, are really bad for any type of pricing, but especially bad for value-based pricing. Because markets change, customer preferences change. So anyway, that's my thought on that.

 

Just my final words, I think like pricing often, certainly in the cost-plus environment, it can be left to a pricing department to a finance department to a sales department to really implement value-based pricing, a value culture in your organisation. You need leadership from the top level from the C suite. It needs to go through every aspect of the company to make sure people are aligned, to make sure that the company is all moving in that one direction. Let's be honest, that's hard. That is difficult. Do most people have an appetite for it? I also argue that this is one of the reasons why value-based pricing people get into it. Not when they're having great times. They tend to get into it and look into it when they're having problems. Because when everything's going swimmingly, do people really want to push themselves to do a lot more hard work? People tend to like to enjoy the good times and only look at tough and longer-lasting solutions when bad times hit. But smart companies, smart people focus on the long term, even in the good times. So there you get on the podcast, you get a bit of philosophy alongside your pricing. So I'm going to leave it there today. And I'm gonna pass it on Joanna for final words.

 

Unfortunately, the tenor of executives even the CEO is much shorter than it ever has been. So even if you get a smart executive, they often end up leaving in about 12 to 18 months. So whether they implement a value-based strategy was full-on best intentions and even tried to embed it. Often the person that replaces them can have a completely different view and not be as committed. I suppose in one way you have to remove it. Yes, value-based pricing and any good pricing does require sponsorship from leadership. But really to make it truly last you need to embed that in the culture. You've got to do the hard work to replace those bad habits. Well, not necessarily bad habits all the time, but that cost-plus culture. You've got to replace it over time. Do the hard work in the good times and the bad and that will see you through. So you've got I supposed to simply make new ways a habit for your teams. That can only be done through capability building recognition and rewards through HR. Through incentivising, rewarding people correctly for changing and adapting to new methods and approaches. If people make mistakes, do not use the old blame game. Actually, go okay, what did we learn by that mistake? How can we help fix that mistake? Let's track and monitor and start learning. Again, this is how you know great value-based organisations survive over time. This is why a lot of traditional businesses fail because they don't do that. And often the business and the leader are quite happy with the old way of doing things. It's easier, it's comfortable. They know they're going to move on to another role. But look, I have full optimism that with markets changing now. That we're seeing greater adoption of value-based pricing. But just bear in mind the advice that we've just given here. I think it will serve you well but if you've got any questions let Aidan and I know happy to help.