Is Value-Based Pricing a Matter of Marketing or Customer Experience Design?
The question might seem superficial at first glance, but it’s more than just a matter of semantics. In my view, it has to do with your definition of value-based pricing (or value-pricing as it's sometimes called).
What Is Value-Based Pricing?
The definition I usually use is that value-based pricing is a set of methods and principles for charging for the value you provide. The goal is to capture more of the actual value you provide.
However, there’s an alternative definition that states that value-based pricing is about charging as much as the customer is willing to pay. The goal is to capture more of the value the customer perceives they are getting since the customer is the final arbiter of value.
There’s a small but significant difference whether we talk about actual or perceived value. It can be argued that value is subjective, so all value is actually perceived. But this doesn’t really address the issue as we also need to deal with perspective. This can lead to a bit of an ethical dilemma if your estimate of your offer’s value is lower than what the customer is willing to pay, making you feel like you’re cheating them. Reversely, when customers refuse to accept a price, it leads you to wonder whether the customer is capable of accurately estimating the value you provide.
The Power of Perceptions
A common and hypothetical scenario of value-pricing is selling water in the desert vs on a street in the winter. Parched and on the verge of death, your customers would mortgage their house for a drink. Putting issues of transportation and procurement costs aside, one could argue that it would be opportunistic to, as in this scenario, charge extra just because you can. Uber’s surge pricing is another example of this. The price of a ride with an Uber cab will fluctuate with demand. That policy has led to a lot of criticism even though it’s supply-demand in action, just in a highly visible way.
Now cab rides and water aren’t exactly comparable. The value of water in the desert isn’t just a matter of perceptions but very real. It can mean the difference between life and death. Charging a premium and using your bargaining position in such a way is something I find to be morally reprehensible. But for products and services that offer convenience, rather than means of survival, value is often a result of perceptions.
Marketing Creates Expectations
The way we create perceptions (prior to purchase) is using marketing. We can create unfounded expectations in the mind of customers and use that to gain pricing power. That power may however not last long if their experience doesn’t match what they were led to expect and disappointment will ensue. It’s a short-lived tactic as the customers will likely not return.
You might object that branding proves me wrong. That branding is about building some kind of ethereal quality to your business and that brand products often aren’t superior or competitors’ offerings yet still result in higher perceived value. Even if that were the case, building such a brand is a massive investment and such work involves more than appearances. It also needs to affect the business at so many levels that its influence goes beyond marketing. The insights into what drives customers will have an influence. It’s reasonable to assume that the effort of building a brand will increase the likelihood of positive customer experiences.
An Unnecessary Schism
Professionals, such as customer service developers and service designers, who work close to end users and their customer’s customers are often aware of the pain points and needs of these individuals. Their work relates to what happens after a customer has chosen a specific company. It’s a matter of heightening the experience after a “Which one?” choice. How these individuals judge that experience is highly influenced by what they were led to believe, the purview of the marketing department.
Designers and marketers often work in isolation despite seeming to have similar goals. Service designers, UX designers and marketers could be said to share many terms and methods yet at some level they appear to operate with vastly different goals. While marketing’s role has traditionally been to attract customers, designers and business developers have often been driven by a sense of needing to speak on behalf of the customers drawn in to the honeypot by said marketing. Designers focused on improving the customer experience may harbor distrust towards marketers who are seen as being manipulative. These designers will likely see themselves as being the true champions of the customer. The knights in shining armor, mounting their steeds to challenge the windmills of marketing.
Until now, this schism has been a nuisance but not necessarily an obstacle. It leads to some finger-pointing and snide remarks by junior staff in either department. More seasoned professionals develop a pragmatic approach over time. Yet it doesn’t solve the problem that so much work is duplicated. Both will create buyer personas and both will perform similar research to learn more about what drives the buyers. This is often done without the two ever talking or comparing notes.
Even worse today, in the age of content and inbound marketing, when genuine customer concern is a winning strategy, marketing would have much to gain from learning from the insights of UX, product and service designers. Similarly, UX and service designers need to get out of their ivory towers now and then and learn the economics driving the business.
The Answer Is “Both”
The conclusion I’ve drawn is this:
The only way to effectively value-price is to invest in both marketing and business development.
Marketing gives you the tools to stand apart in the competition and attract customers by communicating your differentiation from other businesses. It involves market communication and building a brand.
Investing in business development enables you to actually meet the expectations you’ve built. It involves pricing, relationships, customer service and the total customer experience.
The Importance of Common Goals for Product Design and Marketing
In order to effectively capture more value you need your marketing to be aligned with your efforts in activities that add customer value. You need to educate the customer about what value your provide and then meet, or better yet exceed, those expectations. Your staff needs be well versed in this strategy and understand the importance of delivering on what the customer expects.
It’s important to keep in mind that perceptions of value aren’t just influenced by how you market yourself or what you deliver but how you provide it. Differentiation doesn’t necessarily mean selling something different than the competition but providing it in a unique way that offers superior value to the customer.
One way to start is to bring marketing and product design teams together and establish common goals. A value-pricing strategy based on only giving the appearance of value will not last long. You have to back it up with a superior customer experience. That’s how you get people talking about you and what you do.
This article was originally published on Leancept's old blog.