While there are different ways of optimising your pricing strategy, this guide will explore one of your options: value-based pricing. We’ll explain what value-based pricing means and the benefits, as well as downsides to using this strategy. We’ll then provide you a simple four-step guide to determining value-based prices.
What is value-based pricing?
Value-based pricing means determining the price of a product or a service based on the benefits it provides for the consumer. You are essentially attaching a price to your product or service based on what the consumers think the product is worth.
When you are using value-based pricing you are trying to reach equilibrium where you are maximising your revenue, yet charging the customers an amount, which they are also willing to pay.
As an example, value-based pricing is different from cost-plus pricing. Cost-plus pricing determines the price of a product or service based on the costs of making it. Therefore, if a sock costs $3 to make – including labour, materials and so on – and the company wants a 50% profit, the value would be $4.5.
On the other hand, value-based pricing would focus on determining what value consumers put on the product and therefore would be willing to pay. It might be that the socks are sold in harsh conditions and they are extra good at keeping your feet warm. This could mean the consumer would pay $8 for the socks.
The above example highlights the situations where value-based pricing is most c...
... middle of paper ...
...ou to research your product, your customer-base and your market. Unlike with cost-plus pricing, you can’t view production costs and just determine profit margins, but you have to understand the worth of your product and service to your customer.
In addition, value-based pricing is not a precise method. You’re going to have to tweak your figures, which might add some pressure on your business’ finances. Testing out the different prices can also be difficult when you are handling customer relations, as you can’t change your pricing model dramatically without it impacting your existing partnerships.
Since the model won’t provide 100% accuracy, you’ll need to regularly assess and adjust the pricing, even after you’ve found the ‘sweet spot’. The value customers place on your product or service can change, forcing you to look ahead to stay on top of trends on the market.
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