Practical Value-Based Pricing: Finding Insights in the Customer Journey
In a previous article, I wrote about value-based pricing, what it is and why it's preferable to hourly billing. I noted that hourly billing is not a particularly successful or efficient way to charge your customers. The alternative, which more and more people are looking at, is value-based pricing.
In this post, I will focus on how to increase your ability to charge for value by understanding the customer journey. Something that has a big influence on how you market your business.
Not heard the term customer journey (sometimes called buyer's journey to refer to what happens before the person becomes a customer) before? Keep reading. We will explain the concept shortly!
When you start reading about value-based pricing, it's easy to see that it's pretty vague. Advocates of value-based pricing like to talk about "soft values" such as being genuinely interested, a good listener and acting with integrity. All this is important, but it doesn't help those trying to get to grips with the subject and what it means in practice. In a series of blog posts, I will therefore address a number of practical things you can do to be able to charge for value.
If you have any questions, feel free to comment directly here on the blog and we will respond.
Value-Based Pricing Is Long-Term and a Matter of Strategy and Empathy
If your ambition is to work with value-based pricing and charge for value, it has to affect your whole company's strategy. You can't decide at the last minute that value-based pricing would be nice and adjust the prices in the quote you just wrote. That's too late. You have to start much, much earlier.
Because value-based pricing depends on the customer's experience, before, during and after delivery. You need to influence all these steps to succeed. Value-based pricing requires putting yourself in the customer's shoes and trying to understand their motivations. A strong sense of empathy is therefore essential.
The Customer Journey: A Way to Understand the Customer, From Start to Finish
The design and consulting firm IDEO coined the term customer journey back in 2001, but it is only in the last five to ten years that the idea has gained traction. The customer journey describes the steps, actions and states that the customer goes through during their interaction with your company. A so-called customer journey map with a time axis is often used to illustrate it.
Here is an example from an article on customer journeys in the online magazine Smashing Magazine. This is definitely not a template. You can draw a customer journey map in many different ways.
What customer journey maps have in common is that they apply to a group or type of individual (persona) and have a time axis:
You can find tools online that claim to create the map for you. What the makers of these tools forget is that the basis for an effective tool in these contexts is almost always a high quality analysis and interview work with the right interviewees.
You don't have to create a customer journey map to start using value-based pricing. But understanding the ideas behind it helps a lot. By thinking about what attracts customers and makes them ultimately buy from you, you can influence buying decisions and willingness to pay.
Differentiation and Pricing Power Are the Foundations of Value-Based Pricing
Value-based pricing requires your company to communicate value at all stages of the customer journey. It is very easy to lose potential customers in the huge amount of noise that exists today thanks to the Internet. Your business must stand out from your competitors.
There are several ways to do this. One way to find ways to differentiate yourself is to think about the brands that you yourself are willing to pay more for.
What do these brands do that makes you see their products or services as more valuable?
Is there anything you can emulate or create an equivalent of?
What we are trying to create here is called "pricing power". It refers to a company's ability to raise prices without losing customers. Many people recognize the value of having high pricing power. Warren Buffett, perhaps the world's most successful investor, says it is one of the most important factors when he chooses which companies to invest in.
Your ability to charge for value is purely a result of the customer's perception of your ability to deliver value.
Many Do Not Know What Value They Actually Create for the Customer
To gain insight into the customer journey, you need to make contact with customers, both existing and potential. We often conduct such a study with interviews or questionnaires. The study not only provides knowledge about the customer journey but also about what value the customer expects and demands.
Sometimes you are not aware of the value you create for your existing customers. As a result, you miss the opportunity to communicate to potential customers what you already do and are good at. That's why it is often wise to start by interviewing your existing customers and trying to understand why they chose you and what you do that makes you stand out. This is also a chance to capture customers who are in the process of looking to replace you.
Discovering and Documenting Your Customer Journeys Through Interviews
An effective way to map customer journeys is by interviewing customers. It may sound inefficient, but if you want to get to the heart of the matter and understand how your customers actually experience things, you need to meet, person-to-person.
Step 1: Plan the Interviews
I recommend developing an interview script so that you can conduct the interviews in a semi-structured way. Don't write down a list of questions, but make the script in the form of a mind map with areas you want to ask questions about. By doing this, you can be flexible and have a dialog, not interrogate the person. Bringing pre-written questions means that you have already decided what you want to learn.
Step 2: Conduct the Interviews
It's best to do these face-to-face if possible. You don't have to invite the customer to come to you. You can do it informally, for example in a café. Having two people present is advantageous because one person can ask questions while the other takes notes or asks additional questions. It's also a good idea to be in a quiet environment so that you can record the audio. Recording the conversation will help you when reviewing your notes and potentially having doubts about what was said. said.
This article on Smashing Magazine gives a bit more information on how to make a map and suggests other ways to collect information, such as social media. But I recommend conducting real interviews instead. Of course, you achieve the best results by hiring someone who is an expert in qualitative research. Because that's what we do when we interview people to gain a better understanding. We base so-called qualitative research on materials such as interviews or interpretation of written or recorded content. This is in contrast with quantitative research, which is based on empirical data, observations and often statistics.
The quality of research and interviews greatly affects the value and knowledge provided by the map. It may therefore be wise to turn to an experienced consultant instead. We at Leancept carry out this type of assignment. Contact us – we will be happy to tell you more.
After between five and ten interviews, the material is usually comprehensive enough to be able to analyze and draw conclusions. In some cases, you need more interviews. This depends on whether you have a good selection of people and the information you have received. Sometimes you are unlucky, and the interviews do not provide as much information as you had hoped for. Then you have to recruit more people to interview.
Step 3: Analyzing What You Have Learned
After the interviews are done, we need to analyze the results. Today, you can machine-transcribe recorded interviews and extract text. You can then use ChatGPT and similar services to summarize the text. It can be challenging to get an AI (or LLM) to provide accurate answers. That's why I recommend using a combination of manual and automated methods.
The more traditional and manual approach is to read through the notes or transcripts. Sometimes, we also do so-called coding. This has nothing to do with computer programming but is a way of analyzing material from, for example, interviews. During the coding phase, the researcher categorizes material in a detailed and fine-grained way that makes it possible to draw comparative conclusions between groups and individuals.
It may seem tempting to use AI today. But unless you have hundreds of interviews to go through, I recommend reading and taking notes. The human brain is still the best at absorbing information. It can make connections and associations and the insights you gain in this way are useful in many other contexts, not the least marketing.
Step 4: Know What to Look For
Whichever method you use, it is important to understand what you are looking for.
What we are looking for in this case are the underlying needs that drove the person to start searching for the product or service that you offer.
If you interview existing customers, it may turn out that they have discovered new needs after they started working with you. There may be something in the way you communicate or perform the work that the customer values and that makes them hesitate to look for another supplier.
This is despite the fact that there may also be things they are not particularly happy with. This way you can accomplish two goals with a single action: find out what you are doing right or well, but also find out what you can improve.
Step 5: Compile the Insights as a Customer Journey Map
By plotting the events that people describe on a timeline and then combining several of them, you can create a general customer journey.
Having a customer journey map helps you understand what the customer values the most. With this knowledge, you can then modify the customer's experience with you.
A customer journey consists of a number of touchpoints. These are the times when the customer interacts with you or something you have produced. It could be reading a Facebook post, visiting your website or making a phone call.
By changing these touchpoints to better communicate that you understand and can solve what is most important for the customer, you have taken a big step towards a value-based approach. This can be as simple as changing the first headline on your website or developing a strategy for sharing content on Facebook and Twitter. Other things take more time, such as training customer service staff to treat customers correctly and in a way that builds trust.
Not all customer journeys are identical and not all customers use all touchpoints in the same way or in the same order. But your map doesn't have to be exact to be a useful tool. It is enough for you to find things that can be improved. Many small improvements lead to big differences in how your customers feel about working with you. The map becomes a plan and a prioritization tool for what you want to do.
Become More Competitive by Focusing on the Customer
Many service companies unfortunately think inside-out and are not interested in the need that led the customer to the deal. Instead, they focus blindly on the solution and how to simplify its delivery. Understanding your customers' needs gives you a competitive advantage over most of your competitors.
Thanks to this work, you have hopefully raised your customers' expectations of what you can deliver. But that's not enough. It's also about delivering what you promised in your marketing. In another article, I discuss whether value-based pricing is about marketing or business development. My view is that you have to do both. You have to promise and (over)deliver.
With the insights gained from knowing the customer journey, you can improve your marketing. But it doesn't end there. In future articles, we'll look at how to meet the expectations you've just created.