Undoubtedly, one of the most lucrative pricing strategies is value-based pricing. Last year, as the world experienced a new level of VUCA (volatility, uncertainty, complexity, and ambiguity), it became clearer than ever before that value-based pricing can ensure business continuity not only in times of crisis but also every time consumer preferences and habits evolve. That’s because value-based pricing is a customer-oriented model.
With this model, all pricing decisions are made with customer value in mind. That’s the key to unlocking a better understanding of customer needs and budgets and ideal alignment between value and needs, which ultimately gives companies the necessary flexibility to overcome unpredictable financial situations as well as the ability to build long-lasting relationships with clients.
Quantifying customer value
When quantifying customer value, it’s important to establish the right mindset for this endeavor. As you’re putting customers first, you have to understand that determining value goes beyond calculating an optimal price for customers. It’s preferable not to think simply in terms of increasing productivity and reducing costs. Rather, you could look at it from a different perspective, one that focuses on attracting incremental customer revenue streams via new or improved products.
Understanding that the value of your products or services is determined by your customers and not by your company is the first step in correctly quantifying customer value. Customers will make transactions with you only if or when they perceive the value they will benefit from.
As such, it’s essential to understand what your customers value most and offer that to them. Nowadays, what customers want the most goes beyond price, functionality, and features. It’s more about the experience and benefits that can include ease of use, higher availability, etc.
Once you understand this, it’s easier to start quantifying value (and delivering it, too) because, as the saying goes, “what gets measured gets done.”
So, what are the ideal practices for measuring customer value? Since customer value is the sum of all the costs you incur for a customer, you should consider factors such as time/cost of delay, number of active users and end customer, satisfaction scores, number of solved/unsolved defects, number of features delivered, and more. You can check these during the product review stages and measure them after delivery.
Next, you can calculate the profit contribution of each customer in the current year, develop a realistic estimate of how long you might retain each customer, and investigate financial, predictable, and soft value.
1. Customer financial value
To map out financial customer value, you can look at turnover rates per year, marketing costs, service and account fees, and attraction and retention costs. Doing so will help you determine how much you spend on a customer and which marketing channels are worth investing in further. For example, you can determine whether email marketing or social media advertising is attracting more customers and focus most of your investments in a profitable direction.
2. Predictable customer value
By mapping out future customer value, you can convert customer loyalty into real figures. Having insights into data that tells you how recently a customer made a purchase from you, how often is that customer making a purchase, and the average monetary value of those purchases can help you identify customer segments that are worth investing in more. Separating your customer base into segments can enable you to see behavioral patterns and delve deeper into the type of relationships customers have with your company. Ultimately, this will allow you to rethink your agreements, develop new retention strategies, and determine lifetime value.
3. Soft customer value
To determine the soft customer value, you must reach out to your customers. It’s the only way to know how satisfied they are with your products or services. So consider measuring the Net Promoter Score (NPS) and ask whether or not your customers are likely to recommend your products. And more importantly, ask them why they would or wouldn’t. This can help you improve your products and your customers’ experiences with your company.
The power of customer value
Putting the customer at the heart of your business is undoubtedly the best way to do business. But doing so can throw you in a loop of unanswered questions about profitability, acquisition costs, marketing expenses, production costs, and more.
Luckily, these questions have clear answers as long as you know where to look. So, start by focusing on the depth and longevity of your existing customer relationships. It’s the most intuitive thing to do before you start doing the actual math.
Determine which of your existing customers buy from you repeatedly and then learn how often they make a purchase. Consider separating customers into segments based on purchase frequency, volume, and product types. Look into the customer defection rate and then rank your customers’ likelihood to make another purchase from you.
These considerations will provide you with insightful and actionable data about what your customers value so that you can ultimately deliver a greater perception of value to them. This will allow you to create a healthy balance between customer value and value for the customer.
It goes without saying, but quantifying customer value is an important part of your value-based pricing strategy. Just as important as communicating your new value-added offerings to customers. So make sure your customers know that you can give them the value they seek.