Pricing is the means and methods of determining what you will charge for a product or a service. Every firm operates with the primary goal of raising their revenue and earning profits. Pricing is the most critical issue when it comes to determining the revenue and profits of your company. When it comes to these terms, you might have heard of value-based pricing.
Research shows that a 1% change in pricing could have as much as an 11% change in revenue. There are a number of ways of setting prices. These include economy pricing, psychological pricing, penetration pricing, premium pricing, and price skimming. The most competitive pricing strategy is value-based pricing.
What Is Value-Based Pricing?
This is also known as optimized pricing. It is a strategy used to set prices primarily, but not exclusively pegged on the perceived value of the product or service to the client. The pricing often ignores the cost of the product or the historical pricing.
This is the pinnacle of product or service pricing. It’s also the most challenging form of pricing as it requires lots of research. This is simply a pricing process that utilizes data to reach a profit-maximizing decision. What makes it the most challenging is that it is about trying to get an ideal pricing for the product or service.
How to Determine a Value-Based Price
The value-based pricing concept is used is nearly all industries. Armed with the market data it’s time to compute the optimal value-based pricing. There are three issues that will shape the pricing decision based on the market research.
- The first issue is the market gap in terms of availability of products with the same or similar features.
- The second one is the perceived or estimated value of the feature to the clients. This includes how much they are willing to pay for it.
- Thirdly you have to determine the max price and the minimum possible price the consumers would be willing to pay.
You then settle on a price based on the max price and the min price they are willing to pay for the differentiated feature. The truth is that there are external factors which affect value-based approach.
Developing a Value-Based Pricing
Build Buyer Personas: This is always the first step when it comes to value-based pricing. That’s because the eventual pricing reflects the perceived value of the product and its utility value to the end-users. This means you have to develop a psycho-graphic and demographic profile of your potential clients.
This type of pricing can only apply to specific market segments. It’s critical to have multiple buyer personas for the same market segment. You have to know:
- The most valuable feature of the product;
- Its possible alternatives;
- Whether the buyer is cost sensitive;
- The most realistic price they are willing to pay.
Talk To Your Customers: Based on the personas you carry out market research. This is the most critical part of the pricing strategy. Through talking to your potential clients you’ll be able to figure out what value they place on the additional features and how much they are willing to pay for it.
You have to conduct surveys, focus groups, interviews, as well as analyze the social networks. You have to narrow in on the clients who fit the persona or personas that you crafted in stage one. While at it, be observant and look out for any traits you might have missed among the potential buyers.
3 Top Benefits of Value-Based Pricing for Your Product
By its very nature, value-based pricing is customer focused. This means the starting point of production comes from the customer expectations and purchasing power as well as client preferences. It begins with the question, what do customers value in my product?
This buyer-centric approach makes it easier to sell the product. This is because it guarantees product fit from the get-go. This might keep you in the loss territory in the short run. But it always guarantees high returns in the medium and long-run. This client-focus also creates greater buy-in, brand loyalty, established market, and cost-effective, targeted marketing approach.
2. High-Quality Product
One of the advantages of value-based pricing is that its buyer-centric approach always leads to a better product. The fact that it starts with market research means you will be creating products and services that reflect consumer needs. The focus is on the value, not just the utility of the product that you promote. The value element is what makes your product better than others.
The whole essence of value-based pricing is that you come up with a feature or a provision that no one else offers in the market. The eventual product is a high-quality offering that meets client’s needs in a unique and differentiated way.
3. High-Profit Margin
The most consequential aspects of value-based pricing are that the clients are willing to pay a premium for a feature they can’t find anywhere else. In most cases, the price attached to the value raises the margins. But this isn’t always automatic.
If the cost of adding the feature is too high, it will significantly cut down the profit margins. The point is to always ensure that the cost of adding the extra feature(s) is lower or goes lower with each unit produced. Conventionally the profit margins rise. This happens because in value-based pricing you get to remove all the features that clients don’t like.
The best part about value-based pricing is that no matter the competition you still get to determine the profit maximizing value. This pricing method takes time and dedication. But with a promise of guaranteed sales, and high-profit margin when done right. There are three common misconceptions attached to this pricing mechanism.
- Lots of producers think that value-based pricing necessitates the need to evaluate client’s willingness to pay for each feature.
- Value-based pricing will always lead to success.
- The brand value is central to value-based pricing when in fact it is not.
Have you decided upon value-based pricing? Share your experience with us!
The images are from depositphotos.com.