What is Value-Based Pricing & Importance of Value-Based Pricing Strategy?

Reading Time: 4 minutes
Reading Time: 4 minutes

Pricing is the most important aspect of your business. Pricing power is the very important decision in evaluating a business. In our earlier posts, we have discussed different Ecommerce product pricing strategies. Value based pricing is the most discussed or what we can say “the pinnacle of pricing”. However, it is important that you figure out how to get there. So, let’s dig deeper to understand the concept of value based pricing and how can it benefit your business?

  • What is value-based pricing?

What is value-based pricing?

It is the setting of service or a product’s price based on the benefits it offers to consumers. In this strategy, prices are based on the value of service or a product as perceived from the consumer’s perspective. An essential component of value-based pricing is the necessity to determine the customer’s willingness to pay. Simply put, the perceived value determines the value for the consumer.

Value-based pricing strategy doesn’t include solid metrics like labor and material and labor costs, which can be calculated easily. Value is the sum of the materials costs and labor cost needed in production and other associated costs like marketing and distribution. Of course, these factors are considered; however, the prime factor is how much importance the consumer gives to the item and this factor is not at all easily measurable numerically. It thus relies on the customers’ perceived value. Also, this strategy tries to find a price point that is as high as possible devoid of making too many potential consumers avert because of the price.

  • Advantages of a Value Based Pricing Model

Advantages of a Value Based Pricing Model

    • If done properly, value based pricing helps generate the most profit.
    • It offers huge profit margin.
    • It presents accurate information that helps you to derive a price strategy, which brings profit.
    • It enables you to provide phenomenal customer service.
    • It helps you develop higher quality products.
    • Besides determining a more accurate price for the end product, it also benefits your business.
    • It provides you with the opportunity for product innovation and rapid growth.
  • Why should you use Value-Based Pricing?

Why should you use Value-Based Pricing?

With above listed benefits, Value-based pricing certainly proves to be a win-win scenario for your business and your customers.

This strategy ensures that the customers are willing to pay the prices and they feel happy for the value they receive. This strategy involves pricing based on the value your customer perceives in your product. Therefore, it helps create an experience for your customer that’s attuned to their expectations. This will also be beneficial in building your brand, developing superior customer relationships, and thus, finally improving your bottom line. Customers feeling happy to pay the prices for the value they get are more likely to buy from you again. In this way, increasing retention can also increase profits remarkably.

Businesses that offer highly valuable or unique services or features are in good position to make the most of the value-based pricing than businesses with services or products that are comparatively the same from those of their competitors.

  • Advantages of value-based pricing strategy:

Advantages of value-based pricing strategy

This pricing strategy encourages client communication. Determining exactly what the consumer/customer perceives to be valuable means more communication. This improves the level of customer service.

Value-based pricing focuses on consumers’ perceptions. This helps create more effective sales strategies and thus it becomes easy to implement specific marketing tactics.

This kind of strategy seems to be strong in economic recession even, as if a customer feels happy about the product and thinks that he or she is spending his/her money wisely with a product worth it, then he or she will be more willing to pay for the products or services.

All in all, a business having clearly-defined benefits that make it have a competitive edge over its competitors can charge depending on the value it offers to its customers. Though this strategy can prove very lucrative, there are chances of losing potential customers who are driven only by price. Keep in mind that value based pricing is not just a matter of artificially scoring up a product. It needs a clear understanding of what your customers need, want and expect. It is essential to understand the concept and invest time in market research and your competitors. Determining what your customers need and expect and how you can meet their expectations will prove to be beneficial in setting appropriate pricing strategy.