Mastering the dynamics of pricing: An economic value to the customer approach

The economic value to the customer (EVC) pricing model, a customer-centric approach that promotes alignment of product or service price with its perceived value, has recently garnered increased attention for its potential to optimize profitability while establishing a value-centric proposition.

EVC is predicated on the notion that the price of a product or service should reflect the economic value it delivers to the customer, rather than merely covering costs or aligning with market averages. EVC pricing is predicated on the understanding that customers are not just purchasing a product or service, but the value they perceive it will deliver. The pricing is thus a function of the economic value that the product or service creates for the customer. By aligning pricing with this value, businesses can enhance the customer’s perception of value for money, fostering customer satisfaction and loyalty.

An EVC strategy challenges the status quo, turning traditional cost-plus and market-based pricing models on their heads. Instead of focusing on internal factors or market norms, EVC emphasizes understanding and monetizing the customer’s perspective of value.

Calculating economic value to the customer

EVC quantifies the monetary worth of your product or service to the customer, based on the tangible and intangible benefits it provides and the costs it eliminates or reduces.

The EVC can be calculated using the following formula:

EVC = Reference Value + Differentiation Value

The Reference Value represents the cost of the closest alternative solution available to the customer, while the Differentiation Value refers to the additional monetary worth of the differentiated features of your product or service.

Differentiation Value can be further broken down as:

Differentiation Value = ∑ (Value of Differentiating Factors – Cost of Differentiating Factors)

Here, Differentiating Factors are the unique features of your product that provide additional benefits or reduce costs for the customer.

EVC pricing: Use cases

Scenario one: Let’s consider a B2B IT company specializing in cybersecurity. Suppose they have developed an advanced encryption software with superior features compared to its market counterparts, including enhanced data protection, ease of use, and seamless integration capabilities.

The Reference Value would be the price of the closest alternative encryption software available in the market. The Differentiation Value would then be calculated based on the unique features of the software. This could include cost savings due to superior data protection (reduced data breach costs), productivity improvements from ease of use, and cost reductions from seamless integration with existing systems.

Adding the Reference Value and Differentiation Value gives us the EVC, which then serves as a critical input in the pricing decision.

Scenario two: Assume that your firm has developed an advanced cloud-based data analytics solution. This product offers unique features such as superior data security, real-time data analysis capabilities, and seamless scalability, which differentiate it from conventional on-premise solutions.

In implementing EVP, you would first identify the Reference Value, which could be the cost of the on-premise data analytics solution that the customer is currently using. Next, you’ll determine the Differentiation Value. This includes calculating the cost savings from reduced hardware investments, the value addition from real-time analytics, and the cost avoidance from enhanced data security measures.

By summing these two components, you will derive the Economic Value to the Customer. This value can serve as a critical input in determining your pricing.

The strategic advantage of EVC pricing

EVC pricing facilitates strategic differentiation by enabling businesses to demonstrate the unique value of their offerings quantitatively. This can be a compelling differentiator in the competitive B2B IT landscape, where products and services often appear commoditized.

EVC pricing enhances customer satisfaction and loyalty by aligning price with perceived value, ensuring that customers feel they are getting good value for their money. This can drive repeat business, foster customer loyalty, and enhance brand reputation.

EVC pricing promotes cross-functional collaboration, as it requires inputs from various departments, including sales, marketing, product development, and finance. This fosters a shared understanding of the value proposition and enhances organizational alignment.

EVC positions your product or service in a value-oriented context, helping you escape the commoditization trap. This pricing strategy also fosters transparency, conveying a clear message to customers about the specific value they are receiving for the price they pay.

Last but not least, economic value-based pricing encourages cross-functional collaboration within your organization. To calculate EVC, inputs are required from sales, marketing, product development, and finance teams, leading to a comprehensive, shared understanding of your product’s value proposition.

Photo by Artem Beliaikin on Unsplash

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