Pricing products or services to grow your company and maximize profit is one of the most difficult aspects of operating a business. It’s also one of the most important factors in the overall success of your company. Value-based pricing is not always an appropriate strategy, but when it can be used it is a great option for optimizing growth. Is value-based pricing right for you, and how do you price on value?
Each of the three most widely used methods of pricing is better for achieving some objectives than others, and works better in different market conditions. Cost-plus pricing is a good strategy for companies that are just starting up or releasing a new product that need traction in a market that is price sensitive. Competitor-based pricing is good for breaking into a market to compete with other companies already there, but it tends to provide the slimmest margins. It is attractive to customers in price-sensitive markets, but it is not a good long-term solution. Value-based pricing is great for maximizing profits, but it requires the perceived value to be much higher than the cost.
The perceived value refers to how much a customer benefits from a product, which then drives how much they are – or would be – willing to pay for that product. To benefit most from value-based pricing, you need to have your finger on the pulse of the customer and the market you are selling in. You can learn what you need to know by soliciting input – both positive and negative – from customers about the value your offerings provide for them.
Once you know what value your products create for the customer, you need to know if you are selling in a value-sensitive market. Take a look at the characteristics of the market. What is the total potential revenue the market will produce for you and all competitors (addressable market)? If the need for the results your product creates is high enough, the price will matter less. In a value-sensitive market, lowering the price will not result in more sales.
You also need to look at your competition within that market. Compare your value to the competitors’. Do you offer a better value or do they? Perhaps your offerings provide benefits beyond that of your competitors, and they are benefits the customer will pay more for. These are things that you need to know before deciding that value-based pricing is for you.
If you have determined that this pricing model is the right one for you, develop a carefully crafted marketing and sales narrative that conveys those benefits and connects with your ideal prospects using customized messaging. Value-based pricing is not simple to design or applicable in all markets, but it is the most profitable pricing method. It will result in a more loyal customer base with a longer customer lifetime.
Need some help deciding if value-based pricing is right for you, or creating a pricing strategy based on value? We can help. Call us to learn how.