When pricing your retail product, you will need to employ various strategies to determine the best price for an item. The three most common strategies are cost-plus pricing, competitor-based pricing, and value-based pricing. This guide will focus on the third strategy: value-based.
Value-based pricing predicates your prices on how a client perceives the worth of your product or service. More simply, your price is what a customer is willing to pay. Some analysts refer to this method as “customer-based pricing” for that reason. This pricing strategy, therefore, involves careful analysis of what your customers value. Pricing based on value entails selling a product at a cost that reflects its general value in the market.
The following guide will take a deeper look at how to set value-based prices. It will then discuss the benefits and drawbacks of this pricing method to help you determine whether this strategy is the right move for your business.
How to Set Value-Based Prices
Setting value-based prices entails examining information about your customers, your product, and your brand to set a price that reflects consumers’ company valuation. Unlike competition-based pricing, where you look at competitors’ prices, value-based pricing calculations involve plenty of data analysis. So, to begin using this pricing method, you will need to collect plenty of data on what features and services are valuable to your customer base.
First, however, you will need to identify who your ideal clients are. You can use existing marketing data to determine the demographics of your typical customers. For specific products, you will need to highly segment your market to isolate your actual buyers. Then, you can research what those groups tend to value. High-income buyers, for example, are often willing to pay more for a quality product. You can begin surveying current and potential customers to gain insight into how they perceive value. You should also collect information from competitors to understand their pricing strategies.
Once you survey your customers, you must analyze that data to understand what features and services they value. Service plans, add-on items, and quality enhancements might be some of the features that consumers identify as value-boosters. You can then use that information to price your current product more appropriately, and you can incorporate that feedback to raise prices for future releases. As you alter your pricing structure, you should observe how those changes impact your customer base. If sales decline when you raise an item’s price, then you may need to reconsider your valuation. Similarly, you may want to add a higher cost tier for an add-on service if the original sells well.
Benefits of Value-Based Pricing
One major benefit of value-based pricing is that it can enable you to set higher prices without hurting your client base. If customers perceive your products or services as high-value, then they may be willing to pay more — even if competitors offer lower costs. You can also continue to raise your prices by adding features that increase the perceived value of the product. Higher prices mean more money in your pocket, making value-based pricing a favorable strategy in some circumstances.
Additionally, the data collection that a value-based strategy entails will help you stay abreast of market trends and changes in customer behavior. When setting your prices, you will develop an understanding of what consumers value, and you will learn what to observe when adjusting prices in the future. The best way to collect this data is often through interacting directly with customers, which will help your business build a better rapport with them. The information gathering involved in a successful value-based pricing strategy will help your business become more competitive.
Along with using this information to set a price, you can also use it to improve other areas of your business to better fit your customers’ needs. By seeking to increase your products’ value, you will improve the quality of your merchandise. Likewise, collecting customer feedback will help you identify and resolve service issues. A well-designed value-based strategy can therefore help you improve the overall quality and service level within your company.
Drawbacks of Value-Based Pricing
The main drawback of using perceived value to set prices is complexity. Unlike other pricing strategies, which use more simple approaches, setting price points based on value involves time and money. You will need to research how a customer perceives your value. To gather necessary data, you must also expend resources on collection methods like surveys. Further, once you have set your original price, you must continue to perform this data collection to ensure that your prices still reflect the item’s perceived value. Not all businesses have the time and resources to use this method and maintain it.
A value-based strategy also carries the risk of overpricing. Even if an item’s perceived value is high, customers will buy lower-cost options if they are comparable and available. For example, suppose you are selling a big-screen TV for $599. A competitor with a similar model sells it for $399. Your competitor’s price will lower the item’s perceived value in customers’ minds, so you will need to adjust your prices accordingly. Value-based pricing methods require careful monitoring to ensure you do not over-price an item.
Finally, even if you’ve performed extensive research, you still might miss the mark with value-based pricing. Any research on human behavior is subject to human error. This is especially true if you have a limited data sample. You should therefore be careful to use this information as approximations instead of hard numbers, and you should perform further research if your data seems anomalous.
Is Value-Based Price Setting Right for my Business?
Value-based pricing can be an excellent tool for many businesses. If you are able to collect the data to properly execute it, this strategy can boost your bottom line while improving your customer relations. Most analysts recommend incorporating valuations like this in your pricing model for these reasons.
However, in some circumstances, value-based pricing might not be practical. Start-ups, for example, might struggle with this method because they do not have sufficient data to analyze. Small businesses also may have difficulty implementing value-based pricing due to limited resources. This pricing strategy is therefore best for established businesses in mature markets. Additionally, higher-cost goods, such as consumer electronics, often respond better to this strategy than low-cost products, whose margins are slimmer and are often sold on a cost-plus pricing scale.
Whether you incorporate value-based pricing into your sales strategy ultimately depends on whether you are willing to put in the work. This method involves more data collection and analysis than other strategies, but it can pay off in increased revenue and customer satisfaction. Businesses that have the resources to research their products’ consumer worth can benefit tremendously.
For more information, please refer to the following pages:
- Top Factors to Consider When Pricing Products
- What Is Competitor-Based Pricing?
- What Is Cost-Plus Pricing?
- All About Dynamic Product Pricing
- Tips for Incorporating Different Pricing Methods
- How to Test Your Product Price
- How to Know You Should Change Your Product’s Price
- How to Price Your Product Perfectly