Here we’ll reveal all you need to know about value-based pricing. We’ll debunk common myths that continue to plague conversations surrounding it, and show you what you need to do to apply value-based pricing within your business.
Value-based pricing is a type of pricing strategy, just like cost-plus pricing, competitor-based pricing or demand-based pricing. The difference here is the determining factor in how prices are set. With value-based pricing, it’s all about the customer. Prices are decided based on the perceived value of a product to a customer, and it’s this value that ultimately sets the price.
Value Pricing Misconceptions
There are two common misconceptions that surround value-based pricing. All too often, the strategy is talked about as if it is a panacea, capable of solving all manner of pricing woes in one fell swoop. Sadly, things are never that simple!
“It’s a guaranteed win”
Like all pricing strategies, value-based pricing can never guarantee a win – no matter how much data is evaluated in the process.
There are always other factors to consider, many of which hold huge amounts of power in determining the success of a chosen strategy. For example, a competitor with rock bottom prices may well derail success, even if the perceived value of its products is lower.
“It’s all about brand value”
Value-based pricing isn’t based on brand value. Of course, the value of a brand will always play a part in decision-making, but it shouldn’t be a determining factor if value-based pricing is being used.
While any chosen strategy should of course align with the overarching aims of the brand and business, value-based pricing is based on the differentiated features that will add value for consumers. As such, these must be quantifiable.
How to Apply a Value-Based Pricing Strategy
Is it time to rethink your pricing strategies? Follow our step by step guide to learn how to incorporate value-based pricing in your business.
Value-based pricing is determined by customers, but the factors that influence a customer’s perceived value of a product will vary dramatically from person to person. So, segments are key.
These strategies can only be successful if they are unique to specific target segments. Take multiple segments into account, considering a range of value-based prices for each segment you intend to sell to.
Prices should be set by considering the value of a product or service, in comparison to those being offered by competitor companies. If the product you’re selling involves several different parts, this gets a little more complicated.
The repair threshold might hold some sway in the perceived value of a product. If this applies to your product, you’ll need to think about the decisions customers will be making when it comes time to repair or replace an item. If it’s more cost-efficient to replace an item entirely this will have a significant impact on pricing.
Know Customer Perceived Value
Understanding your customers is vital if you’re using value-based pricing. You’ll need to know what customers would be willing to pay for your products or service, and how much value your target audience places in the unique selling points of your products.
Think about the added features and other benefits that you offer, and start learning all you can about your customers to find out what these features mean to them in terms of real value.
No matter how much data you gather on your customers, you’ll need to bear in mind that perceived value is never guaranteed. It can always fluctuate as a result of factors outside of your control. Negotiations may therefore be inevitable, regardless of the amount of work you put into your pricing strategies.
Use The Data at Your Disposal
Unless you’re starting a brand new business, you should have plenty of data to help inform your pricing strategies. So use it!
Start by reviewing historic pricing and buying patterns. Before long you’ll have a far better idea of how customers value your products. Delve into this data and try to understand how perceived value changes across different customer segments to get the best results.
Pricing software such as Vendavo Pricepoint can be a huge help in bringing data together, enabling businesses to fully understand the perceived value of their products. The cloud-based price management software provides access to all relevant pricing-related information, helping teams to set and manage pricing strategies with ease.
Review and Iterate
This isn’t an exact science. It’s impossible to predict with 100% accuracy what a target customer might be willing to pay for a product, because there are all kinds of different factors that might impact how a customer feels about a product’s value.
Consistency is key, as value-based pricing isn’t a ‘set and forget’ strategy. To get the best results from value-based pricing, teams must remain vigilant, monitoring pricing data continuously. Any fluctuations in data should be taken note of, and acted upon urgently to ensure that prices remain optimal.
There are several reasons why value-based pricing might fail. Most commonly, the flops are the result of pricing teams not doing their homework. If data isn’t analyzed properly, or important figures are overlooked, these pricing strategies don’t stand a chance.
Facts matter in value-based pricing. An overreliance on conjecture can also hamper the success of these strategies, as can any misalignment or poor communication between sales and pricing teams. But there are ways around these common challenges.
Gain a deeper understanding of your target audience, champion both communication and cooperation within sales and pricing teams, and make full use of data to fully optimize your prices. While there’s no silver bullet in any pricing decision, technology and company-wide dedication can make a real difference to the success of value-based pricing strategies.
About The Author
Robert Irwin, our SVP, Global Business Consulting, has worked in Pricing for over 20 years and has spent the last decade at Vendavo helping customers implement and automate their pricing processes, strategies, and margin optimization. Before joining Vendavo, Robert was the Global Director of Pricing at a High Tech manufacturer where he developed, built and led the Pricing Organization. He is experienced in leading sales and operations teams in the international business environment and has a proven track record of successfully leading organizations through structural and process change. Robert has an MBA from Wake Forest University and a BA (Hons) in International Business from Sheffield City Polytechnic.