July 7, 2016
On July 4th, Kevin Durant agreed in principle to sign with the Golden State Warriors for $54.3 million over two years, which includes a player option after the first year. Durant, a former MVP winner and arguably one of the three best basketball players in the world, will be the highest paid player on the Warriors, a team with the two-time reigning MVP (who is now the 4th highest paid Warrior) and two more All-NBA players.
With Durant leaving a very good team to one of the best in history, the question becomes: does his cost justify the value he adds to an already stellar roster? The simple answer is yes, unquestionably. He fills the role that Harrison Barnes has now vacated and virtually anyone would select Durant’s scoring ability over Barnes’s.
And yet, it is harder to predict exactly how Durant will fit into the so-called “Death Lineup.” The Golden State Warriors, as a business, hope Durant can add the same type of value he added to the Thunder and remain a top caliber player. Even harder to predict (or tangibly calculate) is how to justify Durant’s status as the top-paid player on the team.
Cost vs. value. It’s a common problem. How does one expensive decision impact business performance and how do you measure its value?
Cost-based pricing has been the industry standard for years. It costs $XX to make a product, so that is equivalent to its value. But when digging deeper, this is far from the reality.
In Durant’s case, there are countless statistical analyses that can be performed to determine his value. Namely, RPM Wins shows “an estimate of the number of wins each player has contributed to his team’s win total on the season.” He had 16 last year, good for 8th in the league.
For B2B enterprises, determining value is a little tougher. Revenue and margin display a company’s profitability, but they do not expressly determine a product’s value. This needs to be established through a combination of factors. In particular, competitive, customer, and market intelligence is crucial to determining value.
How do your competitors market their products? Do your customers use your products in a different manner than they would your competitor’s? Have you provided a customized or innovative product that differs from comparable products in the market?
If your customers see more value in what you’re selling, they likely will be more willing to pay a steeper price. Durant has been in the upper echelon of the league for years, so no one can blame the Warriors for pursuing him.
Golden State undoubtedly looked at the remaining free agent options (comparable products) and how their competitors were recruiting Durant. B2B organizations must do the same. Look internally to assess current conditions and then research the marketplace dynamics.
Don’t ignore cost when pricing, however. When looking at Durant’s RPM Wins, there is comfort in being assured he will add some value. Paying an exorbitant fee for perceived value without doing the due diligence can have strong repercussions (see the Lakers’ deal with Timofey Mozgov).
Do what is right for your business performance. Cost is important, but never forget: value is actually the true driver of your pricing. Kevin Durant will not add 16 wins to the Warriors’ record (it’s impossible), but his steeper price tag comes from his ability to help them win a ring. For B2B pricing success, it’s not about following cost to profitability; it’s about understanding how a price represents your company’s (or product’s) true value.