Value pricing:
When pricing your product, you really should be value pricing. In this third article in our Product Pricing Series we are focusing on Value Pricing. Pricing can be confusing, and I appreciate it is tempting to add up your costs and ‘just add a bit’ or to copy what someone else is charging. However, these previously discussed methods of cost plus and competitive pricing are unlikely to be doing your product justice. You have most likely spent hours and hours on product design, packaging, marketing so make sure you put the same attention into your pricing. Your customers and your pockets will thank you for it.
Whilst there are other pricing methods available to you, I am going to tell you why value based pricing is the one that you should put forward first and why it is the one that will make you the most profit
What is Value Pricing?
Value based pricing is all about value! It’s not about being the cheapest nor the most expensive but the best value. While premium pricing strategy is about higher prices and quality, this is about the value you are giving to your customer. Whether that is a retailer, wholesaler, or consumer.
Value pricing is based on setting a price that reflects the value you are giving the consumer and not on the cost of providing the product.
To do this successfully you will need to really understand your consumer, what they like, what they value and what they are willing to pay for. When your customer values your product more than the money they have, they will buy it.
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Why value pricing works?
Customer focus
The key to this premium pricing strategy is the focus on your customer. You will know how much a customer values your product when you understand them in detail. The more you understand your customer, the more you can develop your product to suit what they need and what they value. There are no right or wrong answers as people are different and value things differently. You just need to find what those things are.
Therefore, the most important thing is to get out and talk to your customers. Do market research, complete a customer survey, discover what they want and their willingness to pay. Find out the features that matter to them the most, how your product solves their problems or makes their lives better.
You need to know who your product is aimed at. Your research should tell you where the biggest demand lies and who values your product the most. This customer segmentation is vital to aim your product at your target consumer.
This will help you to develop high quality products. You can develop products really suited to your customer and what they really value rather than just what you think they do. This will stop you wasting time and money on things that the customer does not want or does not care about.
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Fair exchange of value
Value pricing helps you get the highest price for your product. This is because you focus on what you are giving to your customer rather than simply on the price of it. It all comes down to the balance of value.
No Sale
If your customer feels that the money they are paying is heavier (worth more) than the value your product will give, they will not buy.
Would you pay money for something you did not think would be of any use? Of course not.
Sale
If your customer feels that the value they are getting from your product is heavier (worth more) than the cost, they will buy.
Would you buy something you thought would be more valuable than the price to buy it? Most likely, yes. In fact, this is something built into us. For example, we all love a bargain; we are drawn to items we think are worth more but cost us less.
When you know what is important to your customer, you can tailor your product so that it is worth paying more for. The customer will be happy as they have something they really value and you will be happy because you are charging more than you might have done had you used a more simple pricing method.
With value-based pricing, the value that you have put into the product is reflected in the price. The value that the customer is willing to pay for that value is also reflected. The price should not be too high or too low. A win-win scenario all round.
Customer satisfaction
This pricing method will also increase your customer satisfaction scores. Customers will be more willing to pay, and your product will be in greater demand if it has benefits that your customers really want and value. They are more likely to buy again and again and be loyal to your product. This becomes increasingly important should you wish to get your product listed in a key retailer. If you can prove consumer insight, consumer demand and valued benefits, a retailer will be much more likely to list your product.
Helps you generate the most profit.
Value based pricing helps you design products your customers want, and it helps increase demand as customers will value what you are selling. Most importantly for your business survival and prosperity, value pricing is more likely to give you more profit than other pricing methods.
If your product is more useful or answers a specific need better than anything else, then customers will be willing to pay more for it. Think about it; customers do not really care how much it cost you to make or what you think of your competitors. They care about what value they are getting at the price they are paying.
Cost plus pricing may be easy but it does not take your customer or market conditions into account. If you have no idea what the customer really wants and simply add a mark up to your costs, you may well be leaving value behind. The customer could have been willing to pay more.
Price is the element in your business that has the biggest impact on profits. Increased sales and distribution are good as long as they are profitable. Once you have a distribution base, it is pricing that really makes or breaks your business. In a study by McKinsey & Company, they found that a price increase of 1% lead to an increase of 8% in Gross Profit. The numbers stack up; if a company has 10% net profit margins, then raising prices by just 1% can drive a 10% increase in net profit. Test it on your numbers and see the difference it makes. You do not want to minimise your prices and your profits.
Watch outs
While I have been explaining to you that value pricing is the best pricing method, I do accept that there are a few pitfalls. There are also instances where it is not the best method and it would be irresponsible of me not to point these out.
First, for value pricing to be done properly, it takes considerable time and resources. It is not quick and even after all your research, the answers may not be conclusive. However, I strongly believe that the effort is worth it, and your product and business will benefit from this extra time spent. I have seen businesses try to cut corners on pricing and them come to regret it later. It is not worth it.
Customers can be fickle; they can change their minds. Therefore, it is important to keep talking to your customers about what they value and why. You will need to re-visit your prices regularly to check they are still relevant and that the balance has not changed.
You cannot use this method on its own. Just because I said that value-based pricing is better than cost plus or competitor pricing, does not mean that you should ignore them. You must be aware of your own costs and your competitors’ actions. You must make sure that you can afford to sell your product at the price that customers are willing to pay. If you cannot, do not do it. Re-design your product until you can make the profit you need.
Do not ignore your competitors’ actions. Your product should be clearly differentiated from the competition. No-one will pay more for something that they can get the same for cheaper elsewhere.
Where Value pricing works best
This pricing method works best in the following situations:
- Emotion based products (e.g. fashion, cosmetics, personal care)
- Niche markets (where your product delivers something nothing else can)
- In shortages (e.g. cold drinks on a hot day at a festival)
- For associated products (e.g. headphones for mobile phones, ink cartridges etc).
Where value-based pricing would not work is for products that are in a hyper competitive environment when a distinct advantage or value cannot be shown. In this case, the focus is on price and not value so an alternative method should be chosen. Be careful though, make sure you can afford to compete in a price driven market.
It may also not be appropriate when time is of the essence. I would always recommend thorough research into consumer belief and demand. However, I am aware that we do not always have the luxury of time, so another method could be used. This should absolutely be the exception and not the rule.
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