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Value-Based Pricing: Still Worth the Trouble?

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In the face of rising commodity prices, it’s tempting to make the break from value-based pricing in favor of a simpler approach. But is that really the most effective response?

There’s no way around it: the prices of commodities are rising, seemingly with no end in sight. The result is that many companies are feeling the pinch when it comes to pricing. Raising prices may stir up a backlash that can leave the business hobbled. But standing by and hoping for a desired outcome while prices continue to rise can chip away at margins until nothing’s left. Are indexing, surcharges and fees an effective response to the rising cost of commodities?

Here’s the debate:

Value pricing is too complex for us to deal with now. Just tie it to an index and let’s move on.
Even if we could master a value approach to pricing, it would take more time than we have. There’s also value in clarity, which is what indexes, surcharges and fees can deliver.
Indexing is just going to move the complexity somewhere else – like sales.
Indexing is easy enough on paper, but think of the impact it may have on other parts of the business. Is your sales force ready to handle it?
Indexes, surcharges and fees only put more focus on cost.
Focusing on cost comes at the expense of our ability to sell value. If we give that up now, it may be gone forever.
We already sell on cost. What does value have to do with anything?
Hello? Cost is already the subtext for every sales conversation we have. Value pricing doesn’t apply to us.
Switching to surcharges and indexes is only a short-term strategy.
Plus, it can hinder your ability to grow, even as it introduces new risks (such as price volatility). That’s not worth it, no matter what the short-term benefits are.
If we don’t figure this out in the short term, the long term won’t matter.
We need to solve our pricing issues now – particularly rapid increases in commodity materials – so that we can move on to other issues.
Indexes and surcharges result in too much transparency.
Do we really want to give customers and competitors a clear window into how we price? We shouldn’t give up that control.
Since when is transparency a bad thing?
Does linking prices to an index or adding surcharges and fees really leave us that exposed?
We don’t have the brainpower to make value pricing work.
We can’t all be Olympic gold medalists. Let’s stick to what we’re good at.
Nobody is great at this today – so value pricing can give us a leg up against our competitors.
That doesn’t mean we should just wave the white flag and move to indexing, surcharges and fees. Our competitors certainly aren’t. And when they get great at value pricing, they’ll eat our lunch.

My take

Julie Meehan, Principal, Deloitte Consulting, LLP

First things first. This isn’t necessarily an either/or proposition. Indexes, surcharges and fees have their place – often right alongside value pricing strategies. There are probably some products in your portfolio where index-based pricing makes a lot of sense.

But…

I’ve seen companies take an overly enthusiastic leap to indexing, only to find that they’ve given up options along the way. Don’t get me wrong, the relative simplicity of indexing can be refreshing. But relying too heavily on indexing, surcharges and fees can result in a significant loss of control. Suddenly your customers are able to see the elements of your pricing strategy much more clearly – which means they’ll likely start maneuvering to take advantage of it quickly. And what happens when commodity prices slip? Customer expectations may shift just as quickly, possibly leaving you in a less desirable spot than before. There’s just some inherent risk that comes with the territory in indexing.

A key to leveraging value pricing is having a clear understanding of the differences between the cost and value components of your price. From there, you may be able to find some components of your price that you can tie to an index, or cover with surcharges and fees. But what’s left is a real competitive advantage for you – if you manage it correctly. Value pricing is still one of the most powerful ways for companies to keep their edge, even in the face of rising commodity prices. And despite many reports to the contrary, it’s not rocket science.

Don’t give up on value pricing when the going gets tough. Dig in.

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