Posted: 18 Aug. 2020 4 min. Lukuaika

Towards value-based pricing in the industrial sector

Despite many benefits, companies are struggling with the transformation towards value-based pricing. From our experience of working on pricing topics in the industry sector, we have identified five levers for supporting the implementation of value-based pricing.

Value-based pricing brings benefits to companies … but implementation challenges companies also

Value-based pricing is rapidly becoming the preferred sales approach for the innovative products and services that many radical changes in industry structures, business relationships, and information availability make possible. In value-based pricing, the price of a product or service is based on the added value delivered to the customer. Value-based pricing focuses on an outward look compared with a cost-plus strategy that looks inside an organization or a competitive pricing strategy that looks laterally towards competitors.

Companies using conventional pricing approaches often win pitches by undercutting competitors’ prices but thereby risking margin erosion and price wars. Companies following a clear value-based strategy have a competitive advantage and win deals due to strong business relationships, good knowledge of customer needs, and excellent product performance. By focusing on the advantages and the value of a solution instead of its price, companies following a value-based pricing approach have succeeded in shifting the focus away from a discussion revolving solely around price. Additionally, value-based pricing is expected to make pricing more transparent, benefit suppliers that create value, and reduce customer risk.

Five Principles for Building Value-based Pricing

1. Build solid customer understanding and focus on customer value

The consistent focus on customer value is perhaps the most common characteristic of high performing firms. In order to price based on value, you need to have a profound understanding of customer needs and their willingness to pay, buying behavior, information needs, and service preferences. At the moment a significant amount of analysis is conducted in the area of price data analysis. Less attention is given to customer research and the use of customer-based information

2. Quantify and demonstrate the value of benefits

After you have identified and understood value-adding features, you need to quantify them. This is the greatest challenge for value-based pricing. The main thing is to specify the link between the offered features, the customer benefits of the features, and the quantified worth of those benefits to the customer. Based on our understanding, most companies identify features and link them to benefits but fail to quantify the value of those benefits. The trick is to continue to ask “So what?” until one can make a link to the customer cost or revenue driver and demonstrate the economic value. Many industrial companies lack the initiative or capability to develop supporting business cases to demonstrate and explain the economic value of the solutions and technologies that are offered.

3. Remember that one size does not fit all

Value-based pricing is not a one-size-fits-all concept. Thus, prices should be based on an offering’s economic benefit, defined at segment or customer level. Truly applying a value-based pricing strategy is the result of understanding how you as an organization are positioned in regard to customer expectations and competitive offerings: How do customers define value and what are their corresponding expectations and needs? What are competitors offering in order to meet customers’ needs and expectations? What are you offering today? The fact that different customers and customer segments can have different value drivers adds to the complexity of value-based pricing.  

4. Harmonize the pricing and sales approaches

Moving towards value-based pricing will finally promote a shift from transactional interactions to long-term relationships that value the long-term benefit more than short-term success. This shift requires companies to review their selling capabilities. The potential of pricing can only be unlocked if a strong linkage to sales is guaranteed. This is especially true in the case of value-based pricing. Active communication by sales executives to customers must be done to illustrate the advantages of a product or service.

5. Drive change towards value-based procurement

An important aspect is also the customers’ procurement process. As suppling organizations are moving towards value-based pricing, buyers will also have to adjust their current way of working towards value-based procurement. Two key components distinguish value-based procurement from other sourcing strategies. Firstly, the buying organization should focus on impact in the definition of the specification and evaluation methodology. Secondly, financial analysis should go further than just analyzing the costs of purchased goods, services, or solutions.

More information

Essi Huttu

Essi Huttu

Liikkeenjohdon konsultti

Essi Huttu työskentelee Deloittella liikkeenjohdon konsulttina valmistavan- ja prosessiteollisuuden alueella keskittyen erityisesti kone- ja laitevalmistajiin. Essillä on laaja osaaminen valmistavan teollisuuden liiketoiminnan alalta ja teollisuuden digitaalisesta murroksesta. Deloittella Essi keskittyy auttamaan valmistavan teollisuuden kasvua ja uudistumista. Briefly in English: Essi works as a management consultant in Industrial Products & Process Industry Sector, focusing especially on equipment manufacturer sector. Essi has comprehensive experience in manufacturing industry and in digital transformation of manufacturing industry. At Deloitte, Essi is focusing on supporting the growth and the renewal of industrial customers.

Mika Järvensivu

Mika Järvensivu

Energy, Resources and Industrials

Mika Järvensivu toimii Deloittella valmistavan- ja prosessiteollisuuden toimialasta vastaavana partnerina. Lisäksi Mika toimii prosessiteollisuuden toimialavetäjänä Pohjoismaissa. Mikalla on yli kahdenkymmenenviiden vuoden vahva osaaminen teollisen liiketoiminnan alalta sekä näkemys tulevaisuuden liiketoiminnan trendeistä. Deloittella Mika keskittyy auttamaan teollisuusasiakkaita kehittämään kilpailukykyään ja vastaamaan digitalisaation aiheuttamaan murrokseen mm. tekoäly-, IIoT- ja automaatioratkaisuja hyödyntäen. Mika on myös väitellyt tohtoriksi keinoälyn hyödyntämisestä teollisuusprosessien optimoinnissa. Briefly in English: Mika Järvensivu is Partner in Deloitte’s Energy, Resources and Industrials Sector, and Nordic Process Industry Sector Lead. Mika is a Doctor in Science, Process Automation and Intelligent Systems and he has over 25 years of experience in manufacturing, energy and process industries in both consulting and within industry. At Deloitte, Mika is focusing on helping industrial customers to develop their competitive advantage and to respond to digitalization by using artificial intelligence, IoT and automation solutions.

Ville Tiainen

Ville Tiainen

Ville Tiainen vastaa Suomen Deloittella B2B-myynnin transformaatioista erityisesti teollisissa yrityksissä. Villen intohimona on arvomyynnin ja asiakaslähtöisyyden suunnittelu, juurruttaminen ja johtaminen. Villellä on yli 10 vuoden kokemus erilaisista myynnin transformaatiosta ’commercial excellence’ kärjellä teollisessa kentässä. Briefly in English: Ville Tiainen is responsible for B2B sales transformations in Deloitte Finland, heavily focusing on industrial companies. Ville is passionate about designing, implementing and managing value based selling and customer centricity. Ville has more than 10 years of experience in various sales transformations with commercial excellence edge in the industrial field.