What value there is lies in the eye of the beholder

... and should be priced accordingly

A key question in connection with pricing is the alignment of prices to the respective customer needs. In contrast to widespread "one-size-fits-all" approaches, professional pricing methods should be geared to specified customer segments and thus reflect the willingness of different customer groups to pay. This approach, known as "value pricing", is designed to ensure that factors that represent a high value contribution for the customer groups are determined as precisely as possible. Value pricing enables the skimming off of high returns and prevents relevant customer groups from turning away from the company due to excessive prices.

Value Pricing

Hence, buying decisions and customer preferences are based on the individual comparison of the perceived costs and benefits of an offering. Conjoint analysis can be used to determine how customers value different features of a product or service. It aims to find out what combination of attributes most influences their decision making. By offering customers the choice between complete product/service bundles, conjoint analysis presents them with a real life buying decision, i.e., customers are asked to consider the attributes together.

This holistic approach allows the calculation of the utility derived from individual product features. This also applies to price; by adjusting price the customer's willingness to pay can be examined. This results in the ability to determine an optimal price for a customized product. On the one hand, the price should be high enough to fully skim a customer’s existing willingness to pay, while also being low enough not to diminish the demand from profitable customers. In addition results of a conjoint analysis can be used to develop market simulation models, e.g., anticipating customer responses to new products or changes to existing products. At the end of the day a company can identify customers that are particularly price sensitive. Furthermore it can also identify customers who are willing to pay for additional features, e.g. technical services, and those customers who especially value a close relationship.

Learning What Customers Value

When it comes to pricing, the overriding question executives face in their attempts to profitably drive revenue, is aligning price to customer requirements. But knowing that a “one size fits all” approach only leads to sub-optimal results, which customers should be targeted and with which methods, in order to maximise revenue? The price that can be achieved will heavily depend on the perceived value the customer derives from the product or service offering. Consequently, the logical question to ask is what the customer values most about the offering. This may lead to findings that, adding features or services for certain customers may increase their willingness to pay, while for others removing features may in the end not compromise price. Consequently, pricing should differ by customer segment, and even by customers within a segment. The conclusion is that pricing must go beyond the mere determination of price and must additionally embrace the make-up of product and service offerings from a holistic point of view.

In contrast to traditional approaches to pricing, Value Pricing includes a customer perspective. Based on different customer value perceptions, a differentiated approach to pricing can be implemented, that leads to a win-win situation for customers and product/service providers. Finally, knowledge of exactly what a customer values is a distinguishing feature of high performing companies. However, without Value Pricing, there is a significant risk that a company could over-serve or under-serve customers, leading in both cases to margin loss. 

Value Pricing includes a customer perspective

Case Study on Chemical Industry

Value Pricing can play a significant and lasting role in contributing to a company’s overall success. This fact is supported by a project Deloitte recently completed for a client in the specialty chemical industry. As one of the leading companies in this field, the client had set aggressive quantitative and qualitative targets, including goals around product innovation and customer satisfaction. Deloitte was asked to assist in unlocking the hidden potential in pricing, by developing a tailor-made pricing programme. As one of the cornerstones of the solution, Deloitte designed a Value Pricing programme, focused on segment specific value propositions and customer differentiation. Consequently, key areas addressed were, to identify segments based on customer needs along with their willingness to pay. Additional work focused on determining the optimal combination of attributes & price and comparing these to competitors.

To identify and examine the attributes critical to customers we designed an analysis tool. For example, a number of customers paid particular attention to the response times to technical inquiries, lead times for non-emergency orders or the breadth of technical support. Other attributes which played a major role included the degree to which products could be customized to customer needs and the quality of technical information and training. By using cluster analysis the Deloitte team identified several customer segments with distinct needs. These segments were defined by either an exclusive orientation to price, availability and relationship or combinations of these. For instance, the analysis showed precisely (with statistical significance) how many customers were price sensitive and also had strong demand for technical services.

The study also clearly confirmed that a large proportion of customers had a low price sensitivity, and were more relationship-driven. These customers demanded higher service levels and a strong, collaborative business relationship, e.g., during the product development process, but were interestingly willing to pay for this. Our client could immediately identify how the customer relationship could be re-positioned. This had implications for pricing in each segment, in order to capture customer reaction to different attributes. Finally, this enabled our client to tailor product/service value propositions to customer needs.

Key Lessons Learned

It goes without saying, that the task of optimizing price is continuous. A wide variety of factors – from shifts in an individual customer’s strategy, to trends in the global marketplace or environment – require a nearly constant refinement of pricing strategy. But the holistic approach of Value Pricing also implies that the potential value identified needs to be delivered.

If not, the customer will force a price concession. Therefore, monitoring and ensuring performance is mandatory. This also means everyone in the organization – in particular Sales – must understand and adhere to the Value Pricing strategy. After making this journey one chemical industry leader commented, “This isn’t just a quick fix with benefits that fade. It’s a way to fundamentally change the way your people think and the way your company does business, to be more profitable.”

“This isn’t just a quick fix with benefits that fade. It’s a way to fundamentally change the way your people think and the way your company does business, to be more profitable.”

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Till Guthmann, Director Strategy -

Holger Heemann, Manager Strategy -

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