How can you estimate a target price?

In a mature industry, pricing is often set by comparison against direct competitors. But when you’re creating a new class of products in an evolving market it’s harder to see what the right price should be. Over-pricing might reduce your potential sales, but if you price too low then you could give away value unnecessarily.

Pricing by value

As we should all know, it’s important to price by the value of your product or service, not the cost of delivering it. We need to start by creating value for our customers before we can capture some of it for our business.

Balancing value creation and capture

The balance between creating and capturing value can be hard to achieve. Where possible we should avoid competing on price and aim to create indirect savings for our customers. In B2B markets, we might improve the performance and quality of our clients’ products or reduce their costs of consumables, maintenance, and inventory. Providing additional benefits over legacy solutions could allow your B2B customers to increase their own prices. This should allow you to charge more too.

Building a Value Model for your customers

It’s important to understand the ‘Total Cost of Ownership’ for our products, not just what we charge. Here’s a tool for gauging B2B Value Propositions which I’ve used with clients in a variety of sectors. To make it work you need to understand how your customers create value themselves and then see how your product or service can improve this. Some industries provide public data on input costs which can help to estimate value (e.g. Healthcare, Agriculture). In other cases, you will need to build your own value model through ‘customer discovery’ – systematically testing your assumptions in sales discussions.