Confidential and proprietary materials for authorized Verizon personnel and outside agencies only. Use, disclosure or distribution of this material is not permitted to any unauthorized persons or third parties except by written agreement.1Confidential and proprietary materials for authorized Verizon personnel and outside agencies only. Use, disclosure or distribution of this material is not permitted to any unauthorized persons or third parties except by written agreement.

What is Value Based PricingAnd why should I care.

Sander Veraarwww.productcampsg.com

28 September 2013

Confidential and proprietary materials for authorized Verizon personnel and outside agencies only. Use, disclosure or distribution of this material is not permitted to any unauthorized persons or third parties except by written agreement.2

Introduction

Sander VeraarProduct Manager

Verizon Enterprise SolutionsPremier partner for secure IT, communications, networking and mobility solutions delivered to large and mid-size businesses and government agencies globally.

Experience7 years in Product Management and 5½ years in Pricing

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• What is a price?• Common pricing methodologies– Cost Plus

– Competitor Based

– Project Based

• Who sets your pricing?• Why value-based pricing?

Agenda

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What is a Price?

Price[Definition] The amount of money that has to be paid to acquire a given product. Insofar as the amount people are prepared to pay for a product represents its value, price is also a measure of value.Source: encyclopedia britannica http://global.britannica.com/EBchecked/topic/475733/price

S$0.45

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A price communicates a value to a customer

No, Really, What is a Price?

A Bottle of Water

S$0.45

You can buy this for S$0.45

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When considering value, perception can be as important as reality.

What Type of Value?

@cnet Gold iPhone 5S sells for $10K on eBay, worth just $649

Source http://news.cnet.com/8301-13579_3-57604294-37/gold-iphone-5s-sells-for-$10k-on-ebay-worth-just-$649/

For Sale! 1984 Ferrari Mondial Quattro - Asking Price $2500

Fix-her-up. Needs some work. Great Value! (excl. CEO)

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• Price is the monetary value of a product

• Price is a means to communicate value and quality

• Price is a measure of differential value

• Price can influence a customer’s perception of value

Summarizing What is a Price?

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Common Pricing Methodologies

Cost Plus• At its simplest, cost-based

pricing is based on our assessment of the total cost we incur in manufacturing a product or delivering a service.

• It is the default pricing method adopted by most companies

• It is usually applied in conjunction with competition based pricing.

Competitor Based• In competitor based pricing,

we compare the features and specifications of our product with those of the competition.

• Based on this comparison we make a judgment about how the product or service should be positioned and priced.

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Common Pricing Methodologies (cont.)

Project Based Pricing• Project Based Pricing is a

variation on Cost Plus where the assessment of the total cost we incur is based on manufacturing a product or delivering a service for a specific customer.

• Project Based Pricing is used when the product or service required by the customer is well defined and the process to provide it is well understood.

Outcome Based Pricing• Outcome Based Pricing is a

variation on Project Based Pricing where we are paid based on the cost and the quality of the actual work performed.

• Outcome Based Pricing typically acts as a risk sharing mechanism

• Outcome based pricing is used when the customer can only describe the end result but cannot describe the means or processes to deliver this result.

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Value-based pricing is about pricing on differential value. 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.

So how is this any different from the more common pricing methodologies?

What is Value Based Pricing?

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Who Sets Your Pricing

Cost Plus

Your Accountant Sets Your Pricing

Your Competitors Set Your Pricing

Competitor Based

Your Customer Sets Your Pricing

Project Based

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Value-based pricing is about pricing on differential value.

• Differentiation describes any aspect of our total customer offer that is different from that of the competition, and crucially, that is recognized and valued by the customer.

• Our product or service may well be different from the competition, but unless it delivers real value that the customer can identify with, understand, acknowledge, and be willing to invest in, then it is merely a point of difference – and not differential value.

So why Value Based Pricing?

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Finding Differential Value

Revenue gain

Cost reductionEmotional contribution

Value tothe Customer

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Emotional Contribution

Why Pay $10K for a Gold iPhone 5S worth just $649?

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• A value-based price is (1) designed and communicated such that (2) all parties understand, recognize, and accept the (3) distinctive worth of the products or services purchased in the transaction and (4) participate in optimizing the gains created by their use.

Take note that:

(1)A price is specifically designed for each individual transaction

(2)Multiple parties means the buyer, the seller (you) and other stakeholders

(3)Distinct worth means it is objective and measurable (needs reference object)

(4)All parties participate in optimizing the gains (win-win)

Defining Value-Based Pricing

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Who Sets Your Pricing?

You negotiate a price with your customer based on an analysis of the customer’s value-added

processes.

Value Based Pricing

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“Tying pricing to value allowed a network client to boost the price of a new product by nearly 25 percent” (McKinsey)

• “A leading maker of network equipment was bringing an innovative new product to market in the midst of a broad industry slump.”

• “The company called McKinsey to help put in place a “value-based” pricing structure that would better align the price of the product with the benefits it generated for customers.”

• “We worked with the client to identify all the potential sources of economic benefits to customers from using the new product and compared them to the next-best alternative from competitors”

• Source http://www.mckinsey.com/Client_Service/Marketing_and_sales/Case_studies/Pricing_network_product

Application

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• “Product Management is above all else a business function, focused on maximising business value from a product” (mindtheproduct.com)

• “Good product managers think in terms of delivering superior value” (Ben Horowitz)

• “As a product manager you need to be able to explain your product's business value” (Forrester.com)

Why Should I Care?

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• A value based pricing strategy involves your entire organization. It needs a company wide initiative to build value in all parts of the business.

• It calls for detailed knowledge of your customer’s industry and business. You need to build this understanding prior to the first customer meeting.

• Not every customer will acknowledge the real worth of the value you offer. You should be prepared to walk away rather than to compromise.

• Each transaction is unique.

• Your relationship with your customer is central to all transactions.

Closing Remarks