Value Based Pricing Principles – The Advantages and How to Price Based on Value

Reading Time: 4 minutes
Reading Time: 4 minutes

Pricing has the ability to decide the future of your business. It is mandatory to determine a product’s price wisely. Right pricing can do wonders to your business.

There are various different strategies for pricing your product. One of them is Value-based pricing. Value-based pricing is the most discussed or what we say “pinnacle of pricing”.

What is value-based pricing?

In Value-based pricing, price is determined based on the value it provides to consumers. It is the price that customers are willing to pay for a product. Value-based pricing is different from Cost-based pricing. Let’s say you spend $10 in the production of a wireless speaker, you want to earn a 40% profit so you price it $14. Your speaker has a battery life better than your competitors, so customers would readily pay $20 for it. $14 is your Cost-based Price and $20 is Value-based Price.

For Value-based pricing, you must first ensure your product has something unique about it. A company offering products which are the same as his competitors cannot benefit from Value-based pricing. For products having a substitute, the value perceived by customers is low. Henceforth, Value-based pricing is a strategy mainly used in the service sector, where every product is unique and doesn’t have much tangible cost attached to it. For example- A painting by Picasso would have cost a few hundred for making, but its price in the market is more than a hundred times higher than its cost. Price can get as high as what people are ready to pay.

What are the advantages of a value-based pricing model?

  • Increases profit margin

Once you evaluate the price your customers are willing to pay for your product, you can price your product as high as what customers will readily pay. By ensuring you are earning the maximum possible amount from your customers, you ensure you are not leaving any money on the table.

  • A valuable method for understanding and serving customers better

For Value-based pricing, you need to study the preferences of your customer. It will not only help you to determine the right price for your product but also provide you with information on how you can improve your product to offer better value to your customers.

  • It allows you to provide phenomenal customer services

When you recognize your customers’ choices, you can serve them better. Your Customer Relationship Management team can work much more efficiently if they have correct information about customers.       

How do I price my products based on value?

Do your research on your product and service

Research your product and determine the value that each unique element of your product provides to your customer. For example- If you run an e-e-commerce platform, you may have different elements like an aggregated catalog, rich content, CRM management tools, etc, evaluate the worth each of these individually has for your customers. Once you know the value of unique elements you can offer different packages to your customers depending on the elements they want to purchase. Calculate the cost of production and distribution that you want to add to your price. Furthermore, look for features that make your product stand out. What extra do you have to offer that your competitors don’t? You can visit your competitor’s website, blogs, social media handles to see how they are doing with their product.

Identify and analyze your customers

You need to identify your target market, only then you can determine how to provide them with maximum value and what they will be willing to pay. For example- A student will want to pay less than a corporate buyer. When you identify your target market, find someone who receives maximum benefits from the elements of your product. Once you find a target market all your strategies have to be based on their preferences. Conduct a survey to analyze their behavior. Find out the price your customers can happily pay in return for your product. You can send questionnaires if your target market consists of corporate buyers or else make use of different websites which provide readymade survey results.

Combine and evaluate the different data

Now that you have all the data-

  1. The price you charged for your product so far
  2. The price that your competitors charge
  3. The price that your customers are willing to pay

Put this information in an excel sheet and analyze your customers’ behavior at different price levels. See at what price your sales start to decline. Search for the price which provides maximum value to both, you and your customers. Different target groups will receive a different amount of value from your product and thus will want to pay differently. Price your product separately for each of them. Products of two target groups may have slight variation but their prices can differ greatly depending on what value they individually receive from it.

Test and review your price

Pricing product as per the value it provides to your customer is not the end of the story, you need to constantly keep a check on the condition of your sales and fluctuations in the value of your product for the customer.

If your sales start declining, it may be because customers feel your product is overpriced. Provide discount and see how they react. If you have more clients than what you can practically attend, increase your product’s price, your product has a higher value for customers.

Pricing is not a one-time process; it needs to be revised regularly as per the needs of the market. All you need to do is move in the right direction and this strategy can do wonders for your business.

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