Let’s be honest, at times pricing within process manufacturing is a complex beast. With a tangled mess of costs, customers, and competition, managing traditional pricing models feels like herding cats amid a storm of costs, customers, and competition.

Enter: value-based pricing models (VBPM)—the shiny new toy everyone’s buzzing about. with claims it will revolutionize the industry. This pricing model focuses on the value that a product or service provides to customers, rather than simply the cost of production.

At Pricefx, we’ve spent over a decade helping process manufacturing companies tackle their pricing challenges. We’ve seen how the fast-paced world of process manufacturing can throw some serious curveballs. From untangling complex cost structures to meeting diverse customer needs, the road to growing customer relationships and profitability is anything but smooth.

So, is value-based pricing the magic solution? Maybe, maybe not.

We’ve found that while this model can significantly boost profitability, customer satisfaction, and your company’s legacy, it also comes with its own set of challenges. Determining a product’s value while ensuring fairness and equity in pricing can be tricky.

In this article, we’ll break down four key considerations before you transition to a value-based pricing model, and whether it’s the right move for your enterprise.

The Shift to Value-Based Pricing Models: A Fresh Perspective

Balancing Act in Process Manufacturing

Pricing in process manufacturing is a delicate balancing act. Companies often juggle a mix of agreement/contract pricing and spot/market pricing. Getting this mix right is crucial and depends on market conditions, competition, and geopolitical factors.

With fluctuating raw material costs and demanding customers, focusing solely on cost might be a losing strategy. For a company to succeed here they need to be able to react or even anticipate market moves and make smart changes quickly. As a result, many companies are turning to value-based pricing to enhance customer relations, boost reputation, and improve profitability.

The Value-Based Pricing Shift

Now, let’s dive into value-based pricing. It’s all about recognizing that price and value aren’t the same. It’s not just about tagging features with a price; it’s about demonstrating how those features translate into long-term benefits and opportunities for customers.

This approach helps set prices that customers are willing to pay compared to alternatives. However, it’s not always ideal for commodities where value differentiation is minimal. For products with lengthy development cycles, initial pricing might not hold as market conditions evolve.

Three Key Considerations Before Transitioning to Value-Based Pricing Models: Look Before you Leap.

It’s easy to be tempted by the allure of a value-based pricing model and hastily implement this pricing strategy. It sounds promising, offering the potential for higher profits and better customer satisfaction.

However, before you leap, it’s worth taking a moment to review these four key considerations before transitioning to value-based payment models:

1.      The Essential Mind-Shift

Organizations must undergo a significant mental transformation to successfully adopt value-based pricing. It’s not just about changing how you price your products; it’s about changing how you think about value itself. This shift often necessitates bringing in external expertise.

Consulting Firms to the Rescue: To build a solid foundation for value-based pricing, many companies turn to consulting firms. These experts can dedicate time to create Economic Value Estimation (EVE) style data—essential for setting prices that reflect the true value of your product. This data helps ensure your pricing strategy aligns with the value your product provides to customers, rather than just covering costs.

2.      Building a Value-Focused Sales and Marketing Team

Think of your team and infrastructure as an orchestra. Each section—whether it’s the strings, brass, or percussion—plays a crucial role in creating a harmonious symphony. Without a conductor and experienced musicians, the music is off-key. Similarly, having the right departments and team members ensures that your value-based pricing strategy is executed seamlessly and resonates with success.

Beyond data, you need a sales and marketing team that’s trained to navigate the value-based pricing landscape.

Training and Strategy: Sales teams must be adept at presenting pricing in a way that emphasizes value over cost. This involves having value trade-off discussions where discounts aren’t just about lowering prices but about adjusting the perceived value of the product. It’s about showing how cutting costs could lead to higher total costs due to reduced quality or efficiency.

Changing the Game: For example, a "cheap" chemical input for a plastics molding company might seem like a good deal initially. However, if the material causes clumping or increased defect rates, the overall cost rises due to more frequent stoppages and adjustments.

This is where having a team to market and communicate value-based pricing becomes a game-changer. When sales teams can effectively communicate these trade-offs, they shift the conversation from price alone to the broader impact on the customer’s bottom line.

3.      Consider the Tools Needed to Transition to Value-Based Models

Adopting value-based pricing is complex, and having the right software can make a world of difference. Pricing software provides the structure, insights, and process controls needed to manage the intricacies of value-based pricing effectively.

In-House Tools vs. Third-Party Solutions: While some companies might consider developing in-house tools to handle this transition, it often proves to be more trouble than it’s worth.

Developing and maintaining these tools can be costly and time-consuming. Third-party solutions like Pricefx offer best practices and innovative features that can streamline the process and ensure that you’re not reinventing the wheel.

The Power of Pricing Software

Transitioning data and integrating to value-based pricing isn't a walk in the park. Fortunately,  advanced pricing software  can be your secret weapon.

Without Pricing Software:

The process can be time-consuming and prone to errors, hindering your ability to effectively implement and manage your new strategy.

With Pricing Software:

Data-driven insights: Gain a clear picture of your costs, customer segments, and competitor pricing.

Automated value calculations: Quickly quantify the value your products deliver.

Expertise Over DIY: Large companies might feel confident in their ability to create custom tools, but they may not have the specialized knowledge needed for cutting-edge pricing strategies. Process manufacturers excel at engineering products but may lack the expertise in software development and pricing best practices. Investing in a proven pricing tool can save time, reduce costs, and provide a competitive edge.

Transitioning to value-based pricing is more than just a pricing overhaul; it’s a strategic shift that requires a new way of thinking, the right expertise, and the appropriate tools. By embracing this approach with the support of consulting firms and advanced pricing software, you can navigate the complexities of value-based pricing and unlock new levels of profitability and customer satisfaction.

Are Value-Based Payment Models Right for you?

After carefully examining these considerations let's determine if it's value-based payment models are right for you:

Green Light:

• You offer specialty products with unique value propositions.
• You have strong customer relationships built on trust and transparency.
• You're confident in quantifying the value and opportunities your products deliver beyond the product itself.

Red Light:

• You primarily produce commodity products where price is the only differentiator.
• Your customer relationships are transactional and purely price driven.
• Quantifying the specific value, you offer is challenging and unrealistic.

Not every process manufacturer is a perfect fit for value-based pricing. For those ready to make the shift, consider these three key factors before transitioning to value-based payment models.

What to Do If These Considerations Can’t Be Met?

If you’re eyeing a move to value-based payment models but find yourself tangled up in the complexities, it’s time to brace yourself for the potential fallout from not focusing on value.

Companies that ignore this often end up at the mercy of market pressures and endless demands for cost cuts. This can drive them into a race to the bottom, resulting in less-than-ideal practices that nobody wants.

A hybrid approach could be your secret weapon. Mix and match traditional pricing with value-based elements to create a pricing powerhouse. Value-based pricing doesn’t have to be an all-or-nothing gamble; you can ease into it or simplify it and still see impressive results.

Most companies will need to juggle volume and competitive pressures alongside good old cost-plus and formula pricing. By smartly using market, geography, and value-tier segments, you can boost margins while keeping volume and dealing with competition.

Look for Value

Yes, value pricing can be a beast, especially when it comes to whipping up dynamic dispersion analyses or Economic Value Estimation (EVE) assessments. But if you’re willing to dive into the nitty-gritty of value drivers and competitive positioning, you’ll find this data can be a game-changer.

So, before you leap into the value-based pricing pool, make sure you’re ready to swim through the complexities.