Out of all the pricing strategies, it can be argued that value-based pricing is the hardest to achieve.
It requires extensive research and understanding of who your target audience is, the market you’re looking to break into and competitor offerings.
What is value-based pricing?
Value-based pricing is a means of price-setting wherein a company primarily relies on its customers’ perceived value of the goods or services being sold.
Cost-based vs value-based pricing
Cost-based pricing is decided based on the company’s perspective. In contrast, value-based pricing focuses on the customer.
In cost-based pricing you set a price for the product and add a margin on top of it. There is no consideration for product comparisons on the market. Get it wrong and you will be outpriced.
Value-based pricing provides the opportunity for economic and market flexibility while positively impacting your brand image.
Advantages of value-based pricing
More insights: The research you conduct ensures you know your audience, market and competitors enabling you to remain ahead of the curve when it comes to product or service development.
Increased profit: You can maximise your price by asking for the highest price based on the value of the product or service.
Demand driven: Your research reveals an approximation of customers willingness to buy, which helps you create the right amount of supply, avoiding waste.
Customer loyalty: Hyperconnected customers expect to be listened to so achieving customer satisfaction promotes customer loyalty.
Disadvantages of value-based pricing
Time consuming: There is a lot of research and analysis required before you can take your pricing to market.
Perceived value: Perceived value is subjective, and it changes due to cultural, social, economic, and technological factors that are outside your control.
Stability issues: Your whole target market might have to vary perceived values for your products or services, making it harder to set a price point that works for every customer. Meaning that predictable revenue is not always guaranteed.
How to get started with value-based pricing:
Research your target audience
Deconstruct your target customer to understand why they need your product or service. Consider the following things:
- Pain points
This data provides a basic image of your persona, which you can use to define their buying motivations and decisions.
Research your target market
As humans, we operate in niche, personalised environments. Your market is no different. Consider the following things:
- Analyse current customer base
- Assess the competition
- Honestly review product or service
- Conduct market research
- Evaluate your decision
- Monitor social activity
This data provides the foundation for your marketing strategy.
Research your competitors
You should regularly research your competitors to ensure that you’re providing the best product or service for your customers. Your competitor analysis must include:
- Competitor’s features
- Market share
- Strengths and weaknesses
- Customer reviews
This data empowers you to make well-informed business decisions that should keep your product or service ahead of others.
Value-based pricing is powerful. Once established, it will strengthen your brand promise, ensure market agility and provide informed insight into your customers needs.
For additional help on finding the value of your product or service, download our free resource: How to create a Value Proposition.