Chief Evangelist and VP of Innovation at Pricefx. Brand ambassador, keynote speaker, author, pricing expert & podcaster.
Business visionary Peter Drucker is known to have once said, “Because the purpose of business is to create a customer, the business enterprise has two—and only two—basic functions: marketing and innovation.” Taking that a step further, innovation creates value, and, in my opinion, it is marketing’s job to quantify and communicate that value to the market and set prices.
Experience has also shown me that for marketing to be truly effective, it must be reinforced by other departments in a collaborative environment. Marketing must comprehend, quantify and communicate, while product must create and sales must convince and capture. Together they work together in a virtuous value cycle.
It is also important to place comprehension of value before determining price, which many organizations have gotten wrong. I found this to be one of the most salient points made in Monetizing Innovation by Georg Tack and Madhavan Ramanujam. If you do not comprehend value and pricing before creating a product, there is no way of knowing if you can produce something for a profit.
There are a variety of techniques for comprehending value such as conjoint and Van Westendorp analysis. Once the value is understood, you can price accordingly by deciding how much of that value you want to capture with the price. The concept of a price value equivalence line is useful to determine where you want to be, and there are several pricing strategies that can be used here, such as skimming, penetration pricing, etc.
These value pricing techniques are well understood in the pricing community, but, in my experience, there is often much less focus and sophistication in modern businesses in the remaining steps in the process, specifically in the communication, capture and measurement of the value provided to the customer. In business-to-business companies, this is the responsibility of the outbound marketing and sales organizations. Let’s take a closer look at the way best-in-class organizations not only value price but also value sell.
First, the amount of time and resources spent on market research and data-driven analysis vastly exceeds the effort put into structured engagements with potential and existing clients to understand their value drivers. Conversely, the return on the time and resources invested is much higher in these more structured engagements with current and potential clients. That is because these sorts of engagements yield much more specific and actionable insights than higher-level studies of the market and data.
Another way of thinking about this is the “jobs to be done” framework developed by Clayton Christensen. The idea is that your customer is hiring your product or service to do a job, and there are other potential ways of getting that job done. One of the best examples of applying this framework to better understand customer behavior is the now-famous fast food milkshake study.
A fast food chain hired one of Christianson’s colleagues to help them improve milkshake sales, and that researcher noticed a curious trend of people buying milkshakes in the morning. His team then interviewed the buyers in the parking lot and found out the job they were hiring the milkshake to do was to fill them up and keep them occupied on a lengthy commute. By better understanding the value drivers, and the company could better cater to them in marketing and operations.
The value drivers for most “jobs to be done” fall into one of these categories.
1. Financial.
2. Operational.
3. Psychological.
4. Reduced Risk.
By having structured engagements and actively listening to customers, you can better understand which of these value drivers your customer is hiring your product to improve, and then you can quantify the value in each of these areas. Also, timing is important, as this should not be part of a negotiation process but part of building a stronger relationship with customers.
Here are a few examples of the types of questions to ask your customer.
• How can we help you be more successful?
• What is your alternative to our product/service?
• What happens operationally if I don’t deliver on time or in the promised volume?
• What is our competition doing better than us?
• What are the metrics you use to measure success and your suppliers?
It seems simple, right? It’s not rocket science, but there is an art to it, and I’ve found that many companies are not training their commercial organizations to do this. Yet, the value of value selling is clear: The understanding you gain from these types of engagement can be applied to price negotiations, terms and conditions of the deal, cash flow, quality and more.
Building a collaborative go-to-market mindset among marketing, sales and product is just the start. It is critical for organizations to go beyond market research and data analysis and begin actively listening to customers about why they are hiring you. When value selling is working, even a milkshake has a job to do.
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