Despite the true definition of value being incredibly subjective, it remains a vital aspect for businesses to understand. Depending on your product offering, your business may need to use a value-based pricing strategy. Therefore, the way customers perceive value is key to unlocking your margins and driving revenue. In this article, we will be answering exactly what is value-based pricing strategy and how you can fully utilise it. 

 

 

What Is Value-Based Pricing Strategy and How Can You Utilise It?

 

Most customers are naturally driven by price and want to find the best price for what they are getting. Likewise, they will usually have a general idea of how much something should cost. This is called customer perception. Many businesses draw on this perception of what customers value in order to inform their pricing strategies

 

Though customers know what they are after, they usually have a lack of understanding of what contributes to a product’s value. This provides businesses with ample opportunity to inform value through marketing and branding. 

 

Without adjusting marketing strategies alongside price changes, increasing prices will not change the perceived value of the product. Rather, the customer’s willingness to buy a product is what changes. It’s important to understand these aspects, especially when shifting to a value-based pricing strategy

 

Strategic Marketing Management Process

What Is a Value-Based Pricing Strategy?

 

A value-based pricing strategy is essential when a business sets prices based on the perceived value of an offering. This is different from cost-plus pricing, which is based on the cost of production of the product. 

 

Where cost-plus pricing usually benefits commodities, value-based pricing benefits companies with high competition and price sensitivity. Products usually have unique features that allow them to take advantage of a value-based pricing strategy. 

 

Some brands that use value-based pricing include Apple and Starbucks. Other industries also include designer apparel, cosmetics, personal care, and even Software-as-a-Service or SaaS

 

Advantages 

 

Value-based pricing has a lot of potential advantages when used properly. This includes the ability to price higher right when you launch a product. If you have marketed your product correctly, higher prices can drive hype and exclusivity around a product. 

 

This pricing strategy also gives you a good feedback channel for what your customers are willing to pay. Knowing this can give your business invaluable insight into what needs to be improved and what demand is like. Having this data can enable you to discover the right profit-driving price point for your product. 

 

Likewise, since value-based pricing is customer-centric, you have the ability to forecast solutions that your customers are looking for. This gives you additional perspective into what you should be developing next, allowing you to stay innovative and ahead of the game. 

 

Disadvantages

 

The downside to this pricing strategy is how it can be resource-intensive. You’ll need to invest a lot of time and labour to get it right, which is something that not all businesses can do. As we said in the beginning, value is subjective. This can make valuations imprecise or inaccurate. 

 

Not all businesses will have the resources or time for trial and error. Researching your customer’s values isn’t a one-time endeavour. In fact, you’ll need to keep it up in order to continuously evolve and adapt to the current market. However, if done right, this model can prove incredibly profitable. 

 

Creating A Customer Value Model

 

Once you have decided and gathered data, you can proceed by building a customer value model. Once you have put together a research team that spans the field of product engineering, marketing, and sales, you can begin to put your customer value model together.

 

Below are several key steps to achieve this:

 

Target Market

 

The first crucial step, if you haven’t already done so, is to determine your target market. This will give your team and business a narrower scope to focus on, especially as you begin to conduct field assessments. Having a target market will also help you position your brand accurately. 

 

Value Elements

 

After determining your target market, put together a list of value elements that will affect your costs and offers. This includes technical elements of your product, as well as economic and social factors. You should also consider aspects such as the lifespan of your product, usage, etc. Identifying these elements will help you accurately gauge what sets your product apart from the competition.

 

Data Gathering

 

Once you have put together a list of relevant value elements, you can begin data gathering. You can start by creating field value assessments that can help you know more about your customers. These will help you decide on customer price perceptions as well as the monetary worth of the elements of your product. Surveys and focus groups are a great way to gain insight into your target market. 

 

Using Your Data To Manage Your Value-Based Pricing Strategy

 

The data you collect from research and field assessments will inform your product pricing. However, it’s important to put your learnings to use beyond this.

 

Here are two additional ways you can utilise your data:

 

Managing Your Offerings

 

You will inevitably discover variations in your customer’s needs, which you can take advantage of. The insights can be used to develop lucrative supplementary services or new offerings in the future. By widening your product range through flexible market offerings and innovative solutions, you can attract new customers and maintain existing ones. 

 

Remember that this can only be achieved through a deep understanding of how customers value each element. Likewise, you need a thorough knowledge of what it will cost to deliver these solutions. Remember that offerings that cost more to produce and deliver than they’re worth are sources of value drains. 

 

Manage Customer Relationships

 

The core of a successful business is a good customer relationship. You can strengthen this further through your research in the same way that open lines of communication and feedback mechanisms do. Good relationships can also benefit your reputation and give your business more credibility. 

 

Bottomline

 

As we conclude, a value-based pricing strategy should be based on customer value drivers. They give you a better understanding of what matters to people, no matter how subjective it seems. There may be a lot of work involved, but the benefits you reap are far worth the effort. So, set up the necessary resources to implement it and work with a competent pricing team that can help you navigate pricing strategies. 

 

For a comprehensive view on maximising growth in your company,

Download a complimentary whitepaper on How To Drive Pricing Strategy To Maximise EBIT Growth

 


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