The One Value-Based Pricing Strategy You Probably Never Use

AME Author, Author of Profit in Plain Sight and Boston Conference Workshop Leader. Register for Anne’s workshop at AME Boston! It doubled the company’s profits (including case study and profit calculator) If you’re in a tough, competitive market where price matters, one of the most overlooked strategies for understanding how to price for value is...

AME Author, Author of Profit in Plain Sight and Boston Conference Workshop Leader.

Register for Anne’s workshop at AME Boston!

It doubled the company’s profits (including case study and profit calculator)

If you’re in a tough, competitive market where price matters, one of the most overlooked strategies for understanding how to price for value is the Lost Business Review. We either skip doing them altogether because none of us like asking the awkward questions or hearing the bad-news answers, OR we do them in a half-hearted way, accepting the customer’s excuses at face value.

If you fall into either of those camps, you’re leaving a lot of money on the table.

When you ask your customers why you lost the business, their first answer will almost always be “price.”

Yet that’s rarely the real reason. It’s an easy out for them, and it helps them make sure you’ll sharpen your pencil the next time. However, the real reason is often much deeper, and holds the key to creating a value-based pricing opportunity the next time around.

Yes, there are many sealed-bid situations where it’s “lowest bid” or “lowest compliant bid.” That doesn’t mean you can’t still win the business on something other than a deep-discount price.

Over the years, I’ve trained savvy sales teams to work with the client in advance to structure the Request for Proposal (RFP) so that they are either the most compliant OR the most highly rated vendor on desirable factors…which often trumps low price. An in-depth review of the RFP will often show elements that are favorable to a particular vendor – and that shows you exactly where to up your game. You can also work to be the vendor with the inside track – IBM did it successfully for years.

I’ve also trained sales teams to do a really great job on Lost Business Reviews so that they know almost to the penny what it will take to get the business.  They make use of that competitive edge to close more business at decent margins, or walk away from bad business.

Lost Business Reviews are even more valuable when you’re in a selling environment beyond a sealed bid, i.e. when customers are buying value and price.  You’ll have to gently but persistently dig with your customers to get them to confess to the real reason (beyond the easy out of “price”), but when you do, you’ll typically find that you were out-sold on one of 3 factors:

1. A value proposition that clearly saves the customer time to the extent that a higher price is easily justified.

2. A value proposition that saves or makes the customer money – i.e. an obvious ROI that can support value-based pricing.

3. An intangible sense of peace of mind or a feel-good of doing business with the company that is a subtle yet powerful driver for decision making that you can price for.

You’ll note that in two out of those three cases, it’s emotions, not hard numbers, that are driving the buying decision. Think about your own buying decisions…how often did you make up your mind on what “felt” right, and then justified the price accordingly?

Case Study: the value-based pricing insights that doubled profits

I taught a major trucking firm the art of value-based pricing, and one of several strategies we explored was the role of the Lost Business Review.  Trucking is a highly competitive and commoditized industry, with a sales process largely driven by sealed bids. However, this firm also had a section of the market that was driven by value, not purely price.

Although they’d never done anything more than a cursory review of lost business, the CEO/Owner embraced the concept and followed a rigorous process to review business lost over the previous year. Much to his surprise, he found out that he could have been charging 6% MORE, on average, and still closed just as many deals!

As he drilled deeper with his customers, here’s what he found:

1. They’d been sharpening their pencil too aggressively on sealed bids…and were the lowest by far, thus creating a “race to the bottom” challenge next time.

2. Even on business that was less price-sensitive, they hadn’t factored in the incredible peace of mind and ROI that they delivered as a result of their industry-leading track record for on-time and undamaged deliveries. That gave them tremendous competitive advantage in the value proposition they offered, but they had been pricing as a commodity.

In this case, every 1 percent shift in price (up OR down) was worth 16 percent on his bottom line. And through the Lost Business Reviews he discovered he was leaving an average of 6 percent on the table. The quick math of 6x16 yields a 96 percent increase in profits…just from taking action on the one thing most businesses avoid like the plague.

What opportunities to price for value would YOU find by conducting more rigorous Lost Business Reviews?

For every 1 percent price increase in price, you’ll increase your bottom line by somewhere between 16-38 percent - it depends on the business (don’t believe me? Use the Find 1 percent Pricing Calculator to see what every 1 percent is worth to your business). Then, get out there, do your Lost Business Reviews, and find 1 percent everywhere.

Register for Anne’s workshop at AME Boston! For more information about the Boston Conference click here.

Source: www.ame.org