There are a number of strategies you can use to price your products or services. One of them is value-based pricing. Read all about value-based pricing, its pros and cons, and how you can use it to strategically price goods and services at your small business.
What is value-based pricing?
Valued-based pricing, or customer-based pricing, is a strategy businesses use to charge products or services at a rate they believe customers are willing to pay. Instead of marking up items based on various costs (e.g., production costs), companies that use value pricing base their prices on their customers’ idea of how much a product or service is worth.
The value pricing strategy is not for every type of business. Businesses typically use value-based pricing in highly competitive and price-sensitive markets or when selling add-ons to other products. Companies that offer unique or highly valuable products and features are better positioned to take advantage of the value pricing model.
Some industries subject to value-based pricing models include:
Fashion SaaS Cosmetics Technology
A value-based pricing model is the opposite of cost-plus pricing. Cost-plus pricing looks at cost of goods sold and markup percentage to determine a price. There are also a number of other pricing strategies to choose from (which we’ll get to later).
Benefits of a value-based pricing strategy
At this point, you may be wondering, Should I use customer value-based pricing at my small business? To answer that question, you need to know the advantages of the value-based pricing strategy.
Potentially higher price points
If customers are willing to pay higher prices for your offerings, you can start right off the bat at a higher price point. From there, you can continually add value to your products and/or services and make necessary adjustments to prices and increase your price points even more.
Perceived value can increase
Although your customers see a certain value in your offerings, you can shift your perceived value to make your products or services more profitable. Marketing your business’s offerings as elite, top-notch, high-quality, etc. can help position what you offer as more valuable. And the more perceived value your products or services have, the more massive your markups can be.
Helps you develop higher-quality products
When it comes to value-based pricing, value is everything. If customers don’t see value in your product or service, they aren’t going to be willing to pay the price for it.
Learning what your customers are willing to pay for your offerings can help you determine what you need to adjust to make your product or service better than ever (e.g., adding a new feature).
Value-based pricing can help you continue to progress your offerings, make tweaks, and improve them further. The more value you add, the more your customers will be willing to pay.
Downsides of value-based pricing
Sure, value-based pricing has its perks. But, it also has some downsides. Here are a few disadvantages of using value-based pricing at your small business:
Harder to set a price than other strategies Requires more time and resources Lower markups Not 100% reliable Changes based on cultural, economic, and technological factors
Do your homework and weigh the cons before deciding to use value-based pricing at your company.
Value-based pricing example
To understand this pricing method a little better, let’s see value-basedContinue reading