Identifying obstacles when implementing value-based pricing strategy

Abstract

Pricing plays an important role in the way of making business and profitability in any companies. As global companies operate under constant pressure to maintain competitiveness, the pressure on pricing has increased and more effort has been placed into understanding customer value. Any business activity is built on delivering value to customer, and pricing is the key mechanism to share the value creation between customer and supplier. Pricing strategy that emphasizes this concept is known as value-based pricing (VBP), and it’s one of the three conventional pricing strategies along with cost- and competition-based pricing. In VBP, the price level is determined based on the value that product provides and customer’s willingness to pay.

VBP strategy is increasingly acknowledged by academics as the most preferable pricing strategy for companies aiming increased profitability and customer loyalty but still, it’s often overlooked and neglected by managers in industrial companies. Thus, there must be various obstacles preventing the implementation of VBP strategy. In this context, existing literature have uncovered 10 obstacle groups, which can be divided into four different phases consisting of value-based pricing (value assessment, market segmentation), value-based selling (value communication, salesforce management, customer and product knowledge), implementation of new pricing strategy (organizational structure, change management, top management’s support) and individual obstacles (beliefs and attitudes, experience and skills). Based on this categorization, a framework for identifying these obstacles can be created, but empirical research is needed to complement the analysis of the literature.

The primary objective of this thesis is to identify and examine the obstacles that prevent the use and implementation of VBP strategy at the case company. To identify these obstacles, first it’s necessary to investigate how price management and the level of value-based pricing are understood and practiced in case context. The case company is known as one of the world’s leading suppliers of rock crushing and mineral processing technologies, and the company has recently tried to undergo VBP approaches, but its implementation is still limited and varies across the company, and several challenges have been identified. To examine obstacles better, a qualitative case study was conducted with internal interviews serving as the method of data collection, and the results reveal the similarities with existing research.

Based on the literature review and the findings of the empirical research at the case company, clear correlations were found between the theory and results, as most of the obstacles identified can be well placed in the presented framework. The main obstacles were the lack of visibility and amount of customer data to assess and follow-up VBP, and the lack of segmentation used in pricing. Furthermore, salespeople struggle to convey the true economic value of the product to customer, and the predominant sales incentives are tied to volumes, which encourage sales to prioritize order quantity over value-based metrics, using continual discounts. In addition, corporate pricing structure lacks uniformity and dedicated pricing expertise, and there’s a need for improved collaboration in central pricing organization. It became clear that achieving alignment and communication is essential for successful implementation of VBP strategy, as it demands a cultural shift and broad commitment from various stakeholders.