What Is Value-based Pricing?
When it comes to sales and profit scalability, pricing is the real fulcrum. Developing a strategy for pricing helps brands maximize profits and market demand, among other factors. Simply put, a pricing strategy is an approach you can use to determine the best price for a product.
Pricing is hugely influenced by various market indices, such as production, competitors’ pricing, and target customers. More often than not, sales executives need to account for the pricing strategy due to factors such as business objectives, revenue goals and product positioning. Researching your current market can help provide you with the answers needed when determining the price of your product. Price penetration into an emerging market might involve selling at the lowest possible price to get the customers’ trust while preserving your product features.
Let’s take a look at the basics of pricing, have a look at different pricing types, and discover how sales executives can measure success from a pricing perspective.
Why You Need a Pricing Strategy
Having a pricing strategy helps you optimize profits and remain relevant in the market. Major brands have repeatedly proved that a good pricing strategy keeps you ahead of the competition. In the rapidly evolving mobile industry, Apple has remained ahead of the curve with a pricing strategy that emphasizes the product’s quality. Nike has placed itself as a premium brand at higher prices using celebrities to place its stories in customers’ minds. However, when determining a pricing strategy, there is the need to consider how pricing can affect demand.
Most sales and marketing managers employ the price elasticity formula:
% Change in Quantity ÷ % Change in Price = Price Elasticity of Demand
After adopting a pricing strategy, it is essential to evaluate your pricing against market demands to consistently strengthen your product positioning.
As I said earlier, there are different approaches to pricing, and most of these strategies have been tried and tested over time. Firstly, let’s look at value-based pricing.
Value-based pricing is when pricing is determined by how much customers are willing to pay for a product’s value. Brands that adopt this approach consider their customers’ interests and needs. Brands that use this approach pay close attention to customer feedback and perceived sentiment to ensure they are the best brand for their target audience. Effectively, there are three core factors to consider when using a value-based strategy: Your customers, the market and your competitors.
For instance, before adding a new feature or a product launch, value-based pricing requires that brands gauge customers’ perceived value. To increase their customers’ perceived value of a product, brands employ the services of influencers to set a pricing agenda or increase the value perception relating to the product’s price.
Brands Using a Value-based Pricing Strategy
Louis Vuitton: This luxury brand prides itself on quality and exuberance. Louis Vuitton pitches its exclusivity through its pricing. However, customers are unfazed due to the presence of the LV logo. The brand has stuck to a particular design that essentially represents quality and celebrity status on whomever is wearing it.
Apple: The Apple brand has mastered using customer loyalty, built on their ecosystem, to determine pricing. Being among the pioneers of smartphone technology, the brand has prioritized simplicity in its features, which has influenced its customer base. With its wide range of products, customers tend to spend more on Apple products while also using these tech products to solve their needs.
Starbucks: Another product with a global appeal. The brand name is synonymous with good coffee. Starbucks has cemented its position as having the world’s best coffee despite the presence of lower-priced brands. Customers place value in the opportunity to socialize in a Starbucks and its aesthetic ambience above pricing. Starbucks has also deepened its values with seasonal offerings, thus increasing sales exponentially.
The Pros of Value-based Pricing
- Easy market penetration: With customers’ trust, it is easy to penetrate any market. Successful brands have entered new markets through repackaging features that might be missing in competing brands.
- Increased focus on customers: This approach gives brands a golden opportunity to rely on customers by focusing on their needs. Customers will continually place value on the relationship, even at higher prices.
- Prioritizing higher quality: Brands continue to improve their products’ quality to increase customer satisfaction and loyalty.
- A balance in supply and demand: Brands rely on customers to determine pricing to be aware of the need for bridging the gap in demand and supply. It is imperative to know whom your customers are and having an established number of people who are willing to spend money on your product.
The Cons of Value-based Pricing
- It is difficult to scale: While value-based pricing aims to solve customers’ pain points, it makes scalability difficult. When dealing with a large customer base, value-based pricing requires additional research and resources.
- It is harder to set prices: Customers will always want value for the features added to a particular product. However, brands might find it challenging to select the right price for the added value of a product. In highly competitive markets, competing brands might decide to slash prices to force a shift.
It is difficult to rely on customers’ perceived value when determining the price of a product because people are difficult to predict. Value-based pricing makes customers the center point of pricing decisions. Although, a change in resources can affect your buyer persona, making it harder to meet your sales goals. It requires ample time and resources to convert it into more profits and revenue optimization at a higher level. Also, a value-based pricing strategy is recommended for small businesses with specialized products as most companies adopt the best pricing strategy according to different factors.
Pricefx puts your brand growth at your fingertips with price optimization using artificial intelligence and centralized controls that give you the power to maximize your profits with fewer brainstorming sessions. Pricefx’s PriceBuilder puts you ahead of the competition through precise and timely execution of mass price increases, reducing time spent on planning pricing strategies. Also, this tool allows you to maintain your profit margin even when prices decrease.