The Premium Pricing Framework: Five Steps to Maximize Long Term Value
How Premium Pricing drives Extraordinary Value
In my previous article, Unlocking Long-Term Value (LTV) with the Industrial Problems Framework, I shared a five-step guide to identify and solve your customers' core problems. Solving these problems lays a strong foundation to reduce costs, improve execution, and build customer loyalty over time.
Now, let’s focus on a critical part of LTV: Pricing. The Industrial Problems Framework improves your execution of the core value proposition for your ideal customer. However, it won’t always earn premium pricing unless you intentionally deliver unique premium value that competitors don’t offer.
Earning premium pricing takes time, focus, and determination. It’s a difficult road, but the Framework offers ways to discover opportunities by combining solutions to individual problems. These combinations can create compelling, unique offers that support premium prices.
Why Premium Prices Drive LTV
LTV is the total gross margin generated over the relationship’s life. Higher prices from delivering unique value increase unit margins and extend customer relationships, driving LTV and profitability. Industrial companies tackle multimillion-dollar problems, and premium outcomes like faster delivery, higher reliability, or lower costs capture this value, boosting gross margins and funding innovation. By enabling your customers to deliver greater value to their customers, you create sticky relationships that significantly increase LTV. Premium pricing is about solutions that make your customers more valuable to their own customers, maximizing LTV for both.
1. Aspire to the Ideal
Begin by defining the Ideal product or service for your ideal customer. This Ideal is the perfect offering that customers would eagerly buy. It’s about imagination as much as science. Suspend your rational mind and focus on experience or intuition, not surveys, which often anchor to existing solutions.
Consider these questions to define the Ideal:
What must your product or service be to be undeniably the best in the market?
What problems must it solve to make it easy for your customers to deliver value to their clients?
What single outcome would make you their only supplier?
What feelings must it create for your customers?
What level of reliability, speed, or ease of use is indispensable?
What is the quantifiable value you create?
Actionable Tip: Write a one-sentence description of the Ideal. List your top 5 customers and their markets. Identify attributes that would make a massive difference to them. Use AI research tools like ChatGPT or Grok to help you research.
Example of a prompt I’ve used: "Identify the key attributes that enable industrial products and services to command premium prices, focusing on quality, innovation, customer experience, and brand reputation. Provide examples from manufacturing, energy, or logistics sectors, and explain how these attributes justify higher prices and enhance Lifetime Value (LTV). Avoid region-specific details and proprietary tool mentions, using generic terms like 'predictive analytics.' Don’t constrain yourself to current market solutions and instead focus on solving fundamental problems."
2. Anchor Ideal Price to Customer Outcomes
Price based on how your solution makes your customer more valuable to their customers. Capture about 25% of the quantifiable value you create, with intangibles adding further value.
Actionable Tip: Determine the value your Ideal creates and set the price at 25% of that value. This is your target price.
Example in our business: Power problems impact production goals and customer reputation, creating millions in value risk beyond P&L expenses. Your customer cares about outcomes, not power itself.
3. Build a Pilot and Keep Making It Better
After defining the Ideal and its worth, create a basic prototype. This is challenging, especially for hardware, but start simple and sell it. Expect rejection, but learn from it. I wrote about this in my article, Going from $ 0 to $ X in Revenue for Your Industrial Business where I describe the early days of launching something new.
Actionable Tip: Build something and try to sell it. Don’t overthink. Track your learning.
Example in our business: We’re building a basic energy storage system, collecting data via a digital twin, and gathering insights on power impacts. It’s basic but functional.
4. Raise Prices as You Learn
Each sale reveals willingness to pay. Intentionally learn from customers, especially unhappy ones, and enhance your solution iteratively.
Start at 10% of downstream value, then increase prices to 25% over time and sales until 30-40% of proposals face price objections. Ensure it’s a true price objection, not another concern like your product or service isn’t good enough.
Actionable Tip: Track learning, "no's," and price vs. 25% value target in a Google Sheet. Use AI to analyze and update research, building a proprietary knowledge base.
Example from a “commodity business”: In a prior role, we raised prices quarterly for low-margin customers, doubling gross margins over 2-3 years by delivering more value. Diesel fuel is a commodity, but our solution wasn’t. We learned how to build a more valuable offer over time.
5. Execute Flawlessly
As prices rise, flawless delivery is critical. As a leader, take personal responsibility. Your team may prioritize other tasks based on running the business, so your involvement is key.
Actionable Tip: Update your data set with execution improvements. Track a single metric to tell the execution story. Use AI to analyze weekly progress.
Example: I use Grok to track everything, maintaining a journal in Word and Excel for weekly analysis.
The Payoff
This framework maximizes LTV by enabling your customers to deliver greater value to their clients faster than competitors, capturing high margins, and uncovering new opportunities. It’s challenging, but the payoff is a business with no competitors.