Economic Value Pricing: Is it an Effective Pricing Strategy?
Economic Value pricing is sometimes also called Return on Investment pricing. It is a pricing strategy specific to business rather than the sale of consumer goods. The idea is that as the seller, you understand the economic value your product or service gives your clients and price accordingly. Economic Value pricing is an academic construct and has nothing to do with reality. Many people will say that it is the holy grail regarding business-to-business pricing, but these people come from academia and know nothing of the realities of business. If anyone suggests using Economic Value pricing, run the other way. It simply does not work. It is one of those great ideas that doesn’t work in reality.
Understanding Economic Value Pricing
There are several issues with the idea that the seller should understand their product or service’s economic value and price accordingly. The first is that to understand the economic value, the buyer needs to disclose their process to the seller in excruciating detail so that the seller can analyze it and establish the economic value that their product or service gives. No company would be willing to do that for a seller. That is the first hurdle in economic value pricing. The second issue is that even if the seller finds a buyer who believes in economic value pricing and the buyer actually opens up as required, many assumptions still need to be made. The seller needs to assume how their product or service will be adopted, what training schemes may be required, and what the cost for that training will be. The seller may also need to assume their product or service's efficiency and how much more efficiently a company will use that new product or service. They may also assume how good their customer support will be when needed and the impact it will have on employees. So, there are multiple assumptions that the seller has to make about the buyer’s company and the benefit of their product or service. An assumption is just another word for guessing, it may be an educated guess, but it’s still a guess. Ultimately, you’ll have various values for the buyer's benefits from your new product or service. The final issue is establishing what portion of this ‘pie-in-the-sky’ economic value the seller will take. What is a reasonable amount? And again, we’re back to guessing because this has nothing to do with the buyer's willingness to pay. So, economic value pricing is not going to work.
Possible Economic Value Pricing Benefit
There is one benefit to economic value pricing - if, as the seller, you suggest that the buyer get an incentive to do a detailed ROI study before buying your product or service. This will take some time, but when it’s complete, the buyer will have an internal assessment of the economic value. However, it’s improbable that the buyer will truthfully tell the seller what that economic value is. The buyer will lie because they want the best deal. So, this won’t work either. Another downside is that sellers always want to sell quicker than buyers want to buy. And the ROI study will delay the purchase further.
Hopefully, this has made you aware of some of the pitfalls of economic value pricing. It’s an excellent idea in academic theory, but it is not practical in real life. So, run for the exit when someone suggests economic value pricing to you as a pricing strategy. Google the ‘Price Whisperer,’ and you will find my website, masterclass, and new book, which will help you improve your pricing strategy and price better. I can help elevate your company to the next level with the right pricing strategy, and economic value pricing isn’t it.
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