The general opinion about most markets, is that value based pricing is replacing cost based pricing, on a broad scale.
But the actual key to future success, is customer value creation:
– Be a little bit entrepreneurial, put some skin in the game, is the advice from pricing expert Dr Shaun West.
Customer value creation is a game winner, generally. But in aftermarket sales, it is extremely important, says Dr Shaun West of the University of Luzern, Switzerland.
Shaun West, a lecturer in product and service innovation, has almost 20 years of experience in the aftermarket business. For companies like GE Energy Services in Italy, Sulzer Rotating Equipment Services in Switzerland and RWE in the UK. In each of the roles, pricing has always been an important aspect, from estimating value creation, to M&A transactions and service contracts.
Today, Shaun is bringing together his industrial experience with academic rigor, to investigate and disseminate key issues associated with product-services systems. Primarily, in an industrial setting.
Pricing, of course, tends mostly to be divided into cost based pricing, value based pricing and market based pricing. But the future of pricing, lies in simply understanding what the customer really values, according to Dr Shaun West. Dr West will be speaking at Copperbergs anniversary 10th annual Aftermarket Business Platform, in Wiesbaden, Germany on October 19-21.
– Cost based pricing needs to be moved forward, but a lot of firms are struggling, to find a better way to price. I’ve seen a lot of firms think that value based pricing, gives them higher prices, and that they can get better prices from their customers. But if you price according to their value creation, you end up with a better longer-term relation with the customers. Pricing in a way that helps them, rather than discourages them, from doing business with you and this leads to better margins, says Dr West.
– It’s got many multiple dimensions, that actually means that you end up with more money, for a longer term. Often you end up coming back to a price list, that is cost plus in most cases. Because in particular, you want to make sure, that you are making money.
Dr West, though in academia now (for the past three years), prefers practical approaches to theoretical ones. As he will try to show, at Copperbergs 10th Aftermarket Business Platform:
– I have a model which I am going to use, and present at the conference, to explain how to triangulate on pricing. So you come at it from different directions, so you begin to get a feel, about ”what is the appropriate price?”. And I think that value based pricing, is about what is the appropriate fair price, to charge the customer.
Dr West continues:
– There has been a lot spoken about value based pricing. What I am doing at the moment, is to turn this into a more practical explanation, that firms can effectively use.
There are, of course, different ways of looking at the meaning of the word ”value”.
– Imagine if I sell you an upgrade for your car, and it makes your car use 50 per cent less fuel. How much should I charge, for that upgrade? I could charge you a lot for it, I c
ould give you a payback in a year for it, I could charge you a proportion of the fuel burn that you are burning, so instead of charging you directly I am charging you indirectly. There is a bunch of different ways, that we can identify that value and then create ways to capture or charge for the value.
– If we look at an airline like Lufthansa, it is possible to buy airline tickets, with flexibility. Now you may value or not value, that flexibility. I value the flexibility to re-book, so I tend to buy the mid-priced ticket, which allows me to re-book the ticket. And I would pay more for that, because it saves me from being tied down to a particular time, and that for me is a really important part of value.
Shaun West believes that companies should not be afraid of making entrepreneurial commitments or allowing customers to pay less, if the right value is not being delivered – for example, if a promised deadline is not met.
Putting some ”skin in the game”, may very well yield good dividends.
– It’s customer centric. Understanding, what the customers think, is important. Allowing them to identify for themselves, what is important, and then giving that back to them, explains Dr Shaun West.