The 5 Fundamentals of B2B Value-Based Pricing

Understanding How Businesses Create Economic Value

Value-based pricing is a powerful approach, offering significant benefits for both customer satisfaction and financial performance.

Price Theory, in its approach to modeling business strategies, emphasizes the importance of understanding how companies create economic value for their customers, especially in B2B contexts. This understanding is crucial for implementing value-based pricing effectively.

In this post, we'll explore the five fundamental ways businesses can create economic value for their B2B customers. These strategies form the cornerstone of successful value-based pricing, potentially giving your company a significant edge in the market.

1. Save Time/Effort

One of the most common ways businesses create value is by saving their customers time and effort. This can be achieved by streamlining processes or automating tasks that would otherwise require manual labor.

For example, a project management software that simplifies workflows and enables team collaboration can save employees hours each week, allowing them to focus on more critical tasks. By quantifying the time saved and translating it into monetary value based on employee salaries, businesses can demonstrate the tangible value their solution provides.

2. Replace A Build

Another way businesses create value is by offering an 'off the shelf' product as a substitute for a customer building something themselves. This eliminates the need for customers to invest time and resources into developing a solution from scratch.

A website builder tool that allows businesses to create professional websites without hiring a developer is a prime example of replacing a build. By comparing the cost of the tool to the expense of hiring a developer, businesses can showcase the value they provide in terms of both financial savings and time-to-market advantages.

3. Reduce A Risk

Businesses can also create value by mitigating quantifiable risks for their customers. This could include protecting against potential lawsuits, data breaches, or other costly incidents.

For instance, a cybersecurity software that safeguards businesses from data breaches not only reduces the risk of financial losses but also protects the company's reputation and customer trust. By calculating the potential cost of a data breach and demonstrating how their solution minimizes that risk, businesses can highlight the value they offer in terms of risk reduction.

4. Create New Revenue

Helping customers increase their revenue is another powerful way to create value. This can be achieved by providing tools or services that enable businesses to attract more customers, increase sales, or improve customer lifetime value.

We should note, though, that when modeling new revenue impacts it is important to focus on direct revenue. Data, strategies, and ingredients are all important and valuable assets to a business, but they have second- and third-order impact on generating new revenue. 

An example of first-order new revenue is characterized by an investment with a direct revenue-generating impact. For example, the addition of a solar panel to an existing array would generate additional electricity to sell to a utility provider. In a software case, this could be a new web experience for users that generates affiliate revenue.

5. Direct Savings

Finally, businesses can create value by directly reducing their customers' operational expenses. This could involve cutting costs related to utilities, supplies, or other necessary expenditures.

For example, an energy-efficient smart thermostat that automatically adjusts to optimize energy usage can help businesses significantly lower their utility bills. By quantifying the potential savings over time, businesses can clearly illustrate the economic value their product delivers.

Enterprise Offerings: Creating Value in Multiple Ways 

It's important to note that enterprise offerings often create value for customers in more than one way. A comprehensive HR software suite, for example, may save time by automating administrative tasks, reduce the risk of compliance violations, and help the customer's business attract and retain top talent. In such cases, using a tool like Price Theory can be invaluable in estimating the total value created for each custom enterprise proposal.

Remember, value-based pricing is not just about setting prices; it's about understanding and communicating the unique value your business provides. As you implement these strategies, you'll likely find opportunities for innovation and growth that extend beyond pricing.

We encourage you to review your current pricing approach in light of these value-creating strategies. By doing so, you may uncover untapped potential in your business model and pave the way for sustainable growth and customer satisfaction.

The journey to mastering value-based pricing may be challenging, but the potential rewards make it a worthy pursuit for any B2B business aiming for long-term success.