Value-Based Pricing: Drive Sales and Boost Your Bottom Line by Creating, Communicating and Capturing Customer Value

Value-Based Pricing: Drive Sales and Boost Your Bottom Line by Creating, Communicating and Capturing Customer Value

by Harry Macdivitt, Mike Wilkinson

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A Groundbreaking Pricing Model for the New Business Landscape

Why would any customer choose Brand X over Brand Y, regardless of price? In a word: Value.

When customers feel they are getting good value from your product or service, they are more than happy to pay more—which is good news for you and your business. Even in today’s


A Groundbreaking Pricing Model for the New Business Landscape

Why would any customer choose Brand X over Brand Y, regardless of price? In a word: Value.

When customers feel they are getting good value from your product or service, they are more than happy to pay more—which is good news for you and your business. Even in today’s global market—with its aggressive competitors, low-cost commodities, savvy consumers, and intangible digital offerings—you can outsell and outperform the rest using Value-Based Pricing. Done correctly, this method of pricing and selling helps you:

  • Understand your customers’ wants and needs
  • Focus on what makes your company different
  • Quantify your differences and build a value-based strategy
  • Communicate your value directly to your customers

Now more than ever, it is essential for you to reexamine the reality of the value you offer customers—and this step-by-step program shows you how.

Developed by global consultants Harry Macdivitt and Mike Wilkinson, Value-Based Pricing identifies three basic elements of the Value Triad: revenue gain, cost reduction, and emotional contribution. By delivering these core values to your customers—through marketing, selling, negotiation, and pricing—you can expect an increase in profits, productivity, and consumer goodwill. These are the same value-based strategies used by major companies such as Philips, Alstom, Siemens, and Virgin Mobile. And when it comes to today’s more intangible markets—such as consulting services or digital properties like e-books and music files—these value-based strategies are more important than ever.

So forget about your old pricing methods based on costs and competition. Once you know your own value—and how to communicate it to others—everybody profits.

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Value-Based PRICING

Drive Sales and Boost Your Bottom Line by Creating, Communicating, and Capturing Customer Value

By Harry Macdivitt, Mike Wilkinson

The McGraw-Hill Companies, Inc.

Copyright © 2012The McGraw-Hill Companies, Inc.
All rights reserved.
ISBN: 978-0-07-176168-0



What Is Value?

What is a cynic? A man who knows the price of everything and the value of nothing.

—Oscar Wilde

The word value is used so often in business and so loosely that it is in danger of losing whatever meaning it had. In short, the concept of value itself has become devalued! In reality, value is the core driving force underlying every business decision. Therefore, it is important that we know what it is and how it is defined and used in order to yield real insights into our daily work.

Although easy to ask, this question is really difficult to answer. We discovered just how difficult when we challenged managers from different companies to come up with a robust definition. Here are just some of the answers we heard:

• "Value is getting more than I paid for (or expected)."

• "Value is the perception that I need your solution more than someone else's."

• "Value is perceiving I've had a good deal."

• "Value is getting a feel-good factor from a transaction."

• "Value is making my life a bit easier."

• "Value is a mystery!"

Alan Watson, a London taxi cab driver and greengrocer, had this to say about value:

My family has owned and operated a fresh fruit and vegetable stall in London for more than 90 years. We have come through two wars, a great depression, and a deep recession. We are about to go into another recession. We survived all of these, and we will survive the next one too. How? By listening carefully to what people want, doing our best to give them it—and even a little bit more. People are more interested in value than price, and that's just what I give them. I have customers who have been coming back to me for more than 40 years!

Alan's message is simple, durable, and actionable: "Understand exactly what people want—and give them it!" This is the complete theme of this chapter. The message is simple, but we need to interpret it in the context of the complex, technology-driven, and intensely competitive corporate world of the twenty-first century.


Most of us probably would agree that when it comes to commodities, water is a fairly basic one. When we turn on the tap, we expect water to come out. Here in the United Kingdom, that water is potable and, according to Thames Water, very inexpensive, at around 0.002 cent per liter at the time of writing. On this basis, why would anyone want to pay any more for what is, after all, just H2O? Clearly, a lot of people do. The U.K. bottled water market is worth close to £1.5 billion per year—a high price for something that is so inexpensive from the tap. Somehow the bottled water companies have succeeded in differentiating their offering against tap water—and their other competitors—very effectively. In doing so, they have created benefits in the minds of consumers, perceived or real, to which consumers clearly attach some value. This perceived value is both tangible and intangible. Customers justify their purchases generally on the basis of logical arguments—it's convenient, it has fewer chemicals in it, it's purer, and it's healthier.

How much of this is actually factual and how much is the result of marketing efforts is open to debate. However, value is derived from convenience (you can't take a tap with you!), perceived health and taste benefits (despite Thames Waters' tap water coming in first in a blind taste test some years ago), and image (if the people at the next table in the restaurant are drinking volcanic water from New Zealand, your jug of tap water is going to look a bit sad! Claridge's Hotel in London now has a water menu to sit alongside its wine menu). And the price of a bottle? Anything from a few pennies a liter to $75 and more. For water! Simple H2O with a little extra—brand image, cachet, a bottle designed by Jean Paul Gautier. So what is water really worth? Is it 0.002 cent a liter, or is it $75 or more? Or even ... how much would you pay for a liter of water in the desert?

If a basic commodity such as water can be differentiated so broadly and effectively, imagine what you could do with your own products and services.


Let's drill down a little into this thing called value and try to pull out a few important truths that will help us on the way to creating a robust definition.

Value as a Perception and an Expectation

When we compare one offer with another, we select the offer that captures most completely whatever we are looking for. Our belief in its ability to actually deliver what we expect is based on perceptions alone if no other objective source of information is available at the time of purchase. In this scenario, the buyer is conditioned by the messages received prior to or at the same time as the purchase. Objective reality does not "kick in" until rather later when the purchaser has had time to reflect on the transaction and to observe performance in use.

Value as a Quid Pro Quo

In this situation, we expect a fair transaction in which the worth to us of the item purchased is at least equal to (and certainly not less than) the sum of the sacrifices we make in procuring it—time to search for and choose from among options, cost of money to purchase, the price itself, and any associated psychological risk factors. The sacrifice is not of a monetary nature alone; it also reflects our time and effort in seeking out the good in question and is logically the best use of the limited resources at our disposal. In short, this is a rational buyer's expectation.

Value as an Enhancement of Our Situation

A consumer or a business manager will invest his money in ways that will improve his life in some meaningful manner. While he might be willing to accept a quid pro quo offer, he is delighted if he actually receives more than he expected, especially if what he does receive genuinely enhances his situation.


From our work with many companies, we have learned that clear advantages accrue to businesses that apply a value-based approach to their thinking. A focus on value is really a focus on understanding the actual needs of customers and finding a unique and differentiated way of meeting those needs effectively and efficiently. As soon as we identify a unique approach or create a clever solution, it will be copied quickly. Consequently, a value approach demands single-minded commitment to innovation and creativity—and a sustained and single-minded search for uniqueness. Managers of value-oriented businesses are constantly on the lookout for new ways of meeting, perhaps even anticipating, their customer's needs and doing so in a manner that permits them to exploit their uniqueness.

A frequent challenge salespeople hear is that their products are "just commodities." While this may be true in some cases, it is usually put forward by a shrewd buyer as a ploy to extract some undertaking from the salesperson, usually in the form of a discount or some other deal "sweetener." If we have genuinely incorporated into our product-development processes and our service- delivery activities a real focus on customer value, this should enable us to respond in a manner that repudiates any assertion of commoditization. In short, a value-based approach to business provides an excellent counter to the challenge of commoditization. Differentiation is not just about doing something

Excerpted from Value-Based PRICING by Harry Macdivitt. Copyright © 2012 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
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Meet the Author

Harry Macdivitt served as marketing director in a leading electronic controls company, with specific responsibility for strategic management, new product marketing, and development for U.K. and international markets (United States, Russia). He has run training programs for corporations in the United Kingdom, European Community, North America, and China and works regularly with growth-oriented small- and medium-sized businesses.

Mike Wilkinson works worldwide with clients across a diverse range of industries and business sectors focusing on value and value selling. He has worked in a wide range of senior sales positions and has experience of fast-moving consumer goods as well as business-to-business sales.

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