Setting prices for your product and services is hard. There’s a lot to consider. You have cost of goods sold, profits, customers, competitors, employees, bandwidth, resources, and your own livelihood to think about.
Get your pricing right, and you’ll maximize your profitability and beat out the competition. Get it wrong, and you might end up like Michael Scott Paper Company—you’ll have plenty of customers while you bleed money.
Dialing in the perfect price isn’t an exact science, but it is a learned art. Master the art, and you’ll get that much closer to milking all that you’re worth (and more).
You have a few popular options when it comes to pricing strategies:
- Cost-Plus Pricing: Add a markup to the cost of goods and services to make a profit.
- Competitor-Based Pricing: Set your prices in relation to your competitors.
- Demand-Based Pricing: Use supply and demand to determine your prices.
- Value-Based Pricing: Set your prices by evaluating your customer’s perceived value of your product or service.
We’re big fans of value-based pricing here, so that’s what we’re going to focus on below. We’ll get into all the details about why it’s the best option and how to perfect your value-based pricing strategy.
What Is Value-Based Pricing?
Value-based pricing is all about the customer. Instead of focusing on the cost of goods sold or your competitors, you base your prices on how much your target market believes it’s worth.
Value-based pricing takes time and resources. You have to learn everything there is to know about your target customers, and then you need to dive deep to figure out how they value different products, features, and solutions.
It can take a little while to dial in the perfect price. You can do all the analysis you want to evaluate customers’ perceived value, but you’ll really only learn if your price is right when you launch it to the market and see if consumers bite.
Why Choose Value-Based Pricing Over Other Models?
With so many other pricing models to consider, why should you invest your time in value-based pricing? Good question. We have a few reasons:
Maximize Your Profits
Value-based pricing is one of the best ways to raise your prices. If you use competitor-based pricing or cost-plus pricing, you might sell your products for less than your consumers are willing to pay—and that leaves money on the table.
For example, if you try to match or undercut your competitors’ prices, you may miss out on revenue. They might not have conducted thorough market research, and customers might be willing to pay more for the same product.
Recenter Your Focus on the Customer
Value-based pricing keeps your customer at the forefront of your pricing, marketing, and product design. Other pricing models lead you to look elsewhere at competitors, profit margins, and economic trends. Those things are all fine and dandy, but your primary concern should be your target customers.
Inform Your Marketing Strategy
Value-based pricing helps you find the right price point, but it also helps you dial in exactly what you’re selling. When you sell, you’re selling more than physical goods or services—you’re selling convenience, happiness, security, peace of mind, and many other emotions.
These feelings are often manifested by a product feature, but your customer isn’t really buying the feature—they’re buying the result of that feature.
Take a pickup truck, for example. People come to a dealership with a list of must-have features: rear-view camera, extended cab, engine sizes, and more. But here’s what they really want:
- Rear-view camera: Safety and security
- Extended cab: Room for the family to join
- Engine sizes: Freedom to tow what they need
It’s up to you to determine how much those things are worth. Is a buyer willing to pay $5K extra for a rear-view camera? It might seem like a big ask, but for someone about to drop $25K+ on a vehicle, they might perceive safety and security as worth the additional cost.
Inspire How You Build Products and Services
Once you know the perceived value your customers attribute to certain features and services, now you know what you need to go and build. For example, if you’re building an email service platform, what features are must-haves and which are nice-to-haves?
Is automation a make-or-break feature? What about integrations with popular CRMs? If your market values those characteristics, then you’ll need to include them or be prepared to significantly drop your prices.
6 Tips for a Better Value-Based Pricing Strategy
Now, let’s talk about how to make value-based pricing happen. We’ve said it’s the practice of “setting your prices by evaluating your customer’s perceived value of your product or service.” But how do you actually make that happen?
1. Don’t Get Stuck Putting a Value on Every Feature
The goal of value-based pricing isn’t to attach a value to every product or service component—it’s to find the customer’s valuation of these different features.
For example, adding bacon to your hamburger might only cost an extra $.25, but your customers might be willing to pay $4 more for the bacon-loaded burger. However, your customers might not be willing to pay $6 for double or even triple the bacon. The perceived value has a finite cap.
It’s not about the actual value of your differentiating features—it’s about your customer’s valuation.
2. Remember Your Competitors
Perceived value is important, but so are your competitors. Don’t price in a vacuum.
If your competitors have a scalable product they can sell at unbeatable low prices, value-based pricing might not be able to save you. Sometimes, you’ll have to boost efficiency and drive down costs to afford to be competitive.
3. Don’t Be Afraid to Borrow Elements of Other Pricing Strategies
It’s not always about pricing what you deserve—sometimes, it’s about pricing based on perceived value and supply and demand. Think about it. It’s never cost-efficient to buy popcorn at the movies or a soda at a restaurant. You could buy a 12-pack at the grocery store for the same cost as a glass at dinner.
But people pay for it. They’re hungry or thirsty, and it’s the only option.
Think about your services. If you’re the only available talent to get the job done, your skills are likely worth more than you think. Consider your client’s situation when setting your prices. What’s their perceived value of your products and services because of supply and demand?
4. Get Ultra Specific With Your Customer Segment
Value-based pricing only works if you narrow down your customer segment. If your audience is too broad, you won’t be able to zero in on the right features and selling points.
For example, if you’re selling men’s hiking shoes, you can’t just target men who hike. You need to get specific. Is your target audience backpackers or peak baggers? Do they hike on flat terrain or mountains? Are they quick or slow?
Some hikers might not care about a shoe’s weight or aesthetics, but they’re very critical of its durability. Others might not care about a revolutionary new lacing system or lug design—they just want lightweight, breathable materials.
Getting super specific with your audience lets you position your product to target unique attributes and selling points.
5. Consider the Next Best Alternative
Value-based pricing answers the question of why your product is worth more than the next best alternative. For example, the dress you’re selling might feature pockets—and that justifies (to your customer) why it costs $10 more than the other brand’s pocketless dress.
Identify the next best alternative and define how your product is different. Next, consider the value of that differentiating factor—that’s how you get closer to the right selling point.
6. Forget About Brand (For Now)
Adding brand valuation to your valued-based pricing can muddy up your pricing. Yes, brand is always going to play a part in perceived value, but keep it out of your value-based pricing strategy.
It’s easy to associate more value (and a higher price) for things like “25% stronger materials” or “decreases weight by 15%” or “adds 2 extra USB ports.” It’s hard to do the same with a brand.
You can’t necessarily attach more value just because of your brand name or status—the features and characteristics of your products and services need to do that for you.
Master Value-Based Pricing to Earn What You Deserve
Value-based pricing is an excellent model for setting your prices, but it’s not the only way. Sometimes, another method is going to make more sense for your products, industry, or audience.
But how will you know which method is best? Well, it’s best to take a holistic approach to setting your prices and getting your business up and running.
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