Is value-based pricing the best way to facilitate the growth of your company and increase your revenue? It’s certainly one of the most popular options among business leaders today, allowing organizations to adapt to the perceptions and expectations of their audience.
When used correctly, value-based pricing can improve your conversion rates (and customer loyalty) by encouraging you to understand one simple fact: Your products are only worth what people will pay for them. Following this mindset even means you can increase your prices over time without losing income, provided the perceived “value” of your solution grows.
However, value-based pricing isn’t right for every business, and it’s not always the easiest pricing structure to implement. Here, we’ll explore everything you need to know about value-based pricing strategy in marketing and sales.
What is Value-Based Pricing? An Introduction
Value-based pricing is a strategy used by businesses in a host of industries to price their products and services at a rate that adheres to customer expectations. Essentially, it’s all about charging customers what you think they’re willing to pay based on their perceived value of your solution.
It differs from other pricing strategies in marketing by looking beyond the cost of producing and delivering a product to consider customer sentiment and expectations. When launching new products and services, artists, automotive dealerships, and even SaaS companies use value-based pricing to their advantage. Each business using this model focuses on the idea that:
- The current market influences what customers will pay for a product or service.
- The benefit of the product influences the perceived value of a product or service.
- Competitor solutions and pricing can influence a customer’s perception of value.
Value-based pricing is commonly used in a variety of scenarios and environments. For instance, in highly competitive and price-sensitive markets, companies use value-based pricing to avoid deterring customers. In environments where the demand for a product is high, value-based pricing also ensures companies can charge a premium for innovative products.
Value-based pricing strategies can also help elevate the reputation of a product (a higher price often conveys a higher value) and open the door to upselling opportunities.
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Pricing Strategies in Marketing: Value-Based vs The Rest
Value-based pricing is just one of the most common pricing strategies in marketing today. It stands as an alternative to common options like “competition-based” pricing and “cost-plus pricing.” Both of these alternative approaches to pricing have benefits and are relatively easy to implement.
However, they also have major downsides that need to be considered. For instance:
Cost-Plus Pricing
Probably the most common pricing strategy in marketing and sales, cost-plus pricing involves setting a price for your products and services based on how much they cost to produce. You account for everything from the base cost of materials to labor fees, tax and VAT, and fulfillment costs, then add a “markup” to the overall price of the product to make a profit.
This is a simple approach to pricing that ensures you’re making a return on your investment. However, the strategy disregards the perspective of a customer. Most customers don’t care how much it costs to make a product or how much profit you want to make. They care about getting value for their money and paying for what they believe an item is worth.
It’s also worth noting that the costs of producing your products can change over time, forcing you to increase your prices, even if sentiment towards your solution hasn’t changed.
Competitor-Based Pricing
For companies selling low-cost items, competitor-based pricing is similar to value-based pricing in some ways, as you take the prices set by other companies into account.
With competitor pricing, you check regularly to see what similar companies are charging for their solutions and change your prices accordingly. Depending on your strategy, you might make your prices higher than those of a competitor (if you’re selling luxury products with distinct features), or you could undercut the competition with a lower price.
The benefit of this pricing model is, once again, simplicity combined with a good chance of making sales. If customers are willing to pay a price for a similar product, they’re likely to pay that for yours, too. However, it relies heavily on assuming your competitors have the right pricing strategy in place.
When to choose value-based pricing?
Value-based pricing can be one of the best pricing strategies in marketing for certain companies. It shows you’re adhering to the expectations of your customers and can promote loyalty. However, it’s not right for every business.
For a value-based pricing strategy to work, your business needs three things:
- Scarcity: The value-based pricing model often works best when applied to unique, higher-value products. If your customers believe your product is exclusive, prestigious, or particularly valuable in some way, they’ll pay more for it than a competing solution.
- Differentiation: You need to be able to justify a value-based pricing strategy. This means being able to demonstrate that you have something unique to offer. If your solution is the same as countless other options, then users will expect it to have a similar price.
- The right audience: Your customers, their preferences, and buying behaviors all influence the impact of value-based pricing. If you’re targeting customers obsessed with saving money more than anything else, charging more for additional value won’t help.
Examples of Value-Based Pricing Strategies in Marketing
To understand the impact of value-based pricing and how it works, it’s worth taking a look at some examples. Here, we’re going to focus on companies from three sectors where value-based pricing strategies in marketing are particularly common:
1. SaaS (Slack)
Software as a Service (SaaS) companies frequently use value-based pricing methods to ensure their products appeal to a range of customers with different requirements. You’ve probably noticed most SaaS solutions offer different “pricing tiers,” providing more features and benefits to customers on higher-priced plans. Slack is a great example of this.
The company offers a free version of its products, as well as various different pricing tiers with different benefits. The price of each tier is directly related to the “value” users can access from the service. For instance, the Enterprise Grid plan includes unlimited workspaces and more security:
This model ensures Slack and SaaS companies can give companies and consumers different options to choose from based on how valuable or crucial they consider the tool to be. It also means Slack can charge more for its more advanced products and features, even if it doesn’t cost a lot to implement these capabilities into the software.
2. Fashion (Louis Vuitton)
While many standard high-street fashion brands use cost-plus pricing and competitor-based pricing methods, luxury retailers tend to focus on value-based pricing. They know they can charge more for the same products that other organizations produce because of higher brand equity.
When people purchase a Louis Vuitton bag, for instance, they’re not just paying for high-quality material and designs; they’re paying for the opportunity to showcase their wealth through a connection with the brand logo. This logo appears on all of the Louis Vuitton products, giving them a sense of uniqueness and exclusivity.
Louis Vuitton can easily charge more for its products than other retailers because competing companies can’t replicate what they offer. No one can use the same logo that has already been ingrained in the minds of consumers worldwide.
3. Commodities (DeBeers)
Commodity retailers, such as those who sell diamonds, art, and even everyday products like coffee and sugar, can also use the value-based pricing method. Typically, this strategy is most common in industries where the commodities on offer are scarce.
For instance, diamonds are almost exclusively priced based on perceived market value. Though they’re one of the world’s most common gems, they have a reputation for luxury. They’re associated with wealth, opulence, and luxury, allowing companies to charge more for them.
Companies like DeBeers, who specialize in “natural diamonds,” can charge a fortune for their products because they’re both “luxurious” and appeal to customer values, like eco-friendly and ethical sourcing practices.
How to Set Your Value-Based Pricing Strategy
Compared to competitor-based and cost-plus pricing strategies in marketing, value-based pricing can be a little more complex. You don’t just add up the costs of making your products or copy what other companies are doing; you need to invest in the right research.
Step 1: Analyze your Customers
The first step in a successful value-based pricing strategy is getting to know your customers. After all, your prices will be based exclusively on what customers are willing to pay, so you need to know how much they consider your solution to be worth.
There are various ways to collect this information, from assessing market research reports to reaching out to your existing customers directly. Contacting loyal customers is a great way to get insights into ways of growing your business and adjusting your pricing strategy.
You can find out how much a customer would be willing to pay for your product and how valuable they think it is compared to competing solutions. It’s worth investing in segmentation when analyzing your customers, as different people from different backgrounds may have different insights into what your solution is worth.
Step 2: Examine the Total Addressable Market and Brand Perception
While collecting customer data and organizing it based on psychographic, behavioral, technographic, demographic, and other segments is useful, the information you collect from your audience will be biased. After all, they’ve already proven that they’re willing to purchase your solutions.
If you want to figure out how much new customers are willing to pay, you need to start with market research. This means analyzing the overall value of your market (according to industry studies and guidelines) to understand your potential for revenue.
Beyond this, you’ll also need to get an insight into brand awareness and perception. Just because a company in your industry can potentially set a specific price for a product doesn’t mean every customer will be willing to pay that price when interacting with you.
Gathering insights into how valuable your customers perceive your business to be or the level of “brand equity” they attribute to your brand through surveys, feedback, and social media monitoring can give you more data to work with.
Step 3: Analyze your Competitors
Although value-based pricing isn’t the same as competitor-based pricing, you should still take your competitors into account. The prices charged by other businesses in your industry are likely to influence how much a customer believes a product or solution is worth.
Use analytical tools like SEMRush and Ahrefs to find your top market competitors and find out what they’re charging for products similar to your own. If your product or business is new to the market, and you don’t have the resources for complete market research, competitor insights can be extremely valuable. It gives you a clear view of what people are already willing to pay.
The key to success with value-based marketing is thinking about how your solution outperforms or differentiates itself from other competing options. If your product offers more unique features or you have a higher NPS and customer satisfaction score, you may be able to charge more.
The Pros and Cons of Value-Based Pricing
All pricing strategies in marketing have their pros and cons to consider. If you want to boost your chances of organic growth with the right pricing method, it’s important to understand both the positives and the downsides of the value-based approach.
The Pros of Value-Based Pricing
- Easier market penetration: If your target market isn’t brand-loyal or you don’t have a lot of challenges to compete against, value-based marketing could make it easier to acquire market share. This is particularly true if you have a unique product with exclusive features or benefits that appeal to your target audience.
- Opportunities for price increases: When your business reputation evolves, interest in your industry grows, or customer loyalty increases, you can potentially increase your pricing. The more time and effort you invest in elevating your brand with the right marketing strategies and sales campaigns, the more you can potentially earn.
- Higher mark-ups: The value-based pricing strategy usually works in the company’s favor when a product is seen as important or prestigious. For instance, buyers don’t care how much a luxury car costs to produce if buying one gives them a sense of accomplishment and elevates their reputation. This means you can earn a lot more.
The Cons of Value-Based Pricing
- Markup options can vary: While you can charge more for luxurious or prestigious products with value-based pricing, you’ll struggle to get good markups on items that seem more “generic.” Unless there’s something particularly special about your product, it can be hard to justify charging a higher price than the competition.
- Instability: The value a customer sees in a product or service can change based on cultural, economic, technological, and other factors outside of your control. This could mean that the perceived value of your product reduces over time rather than growing, particularly if a lot of new competitors enter the market.
- Complexity: Finding your valued-based price point is a little more complex than using competitor-based or cost-plus pricing. It’s not an exact science. You need to conduct a lot of market research, collecting insights from reports, customers, and competitors to determine exactly what your solution might be worth.
Should You Use a Value-Based Pricing Strategy?
Choosing the right pricing strategies in marketing and sales is one of the most complex challenges any business owner can face. Setting the right price for your products is crucial for not only increasing your profit margins but also ensuring your business can thrive and attract customers.
A value-based pricing model does have its benefits, from the potential to increase profitability to opportunities to boost relationships with customers. If you can differentiate your product or services from the other solutions available in the market and justify its value, this pricing strategy might work well for you. It’s also an excellent way to reach various audience segments as a SaaS brand.
However, if you’re looking for a simple approach to pricing or you sell something relatively generic, then value-based pricing might not be the right option. The key to success is evaluating your landscape, business, and customers carefully before making your decision.
If you need help choosing the right marketing strategy, elevating your brand, or selecting the perfect price point, find out how a business consultant can help you by contacting Growth Collective today.
FAQ:
What is an example of value-based pricing?
Value-based pricing is used in a variety of industries. One example is a company in the luxury jewelry industry charging a higher price for their selection of watches than their competitors based on factors like exclusivity or brand equity.
What’s the difference between cost-based and value-based pricing?
Cost-based pricing, or cost-plus pricing, involves pricing your products based on the cost of producing them and the profit margin you want to achieve. Value-based pricing involves choosing a price based on the perceived value your audience gives to your products.
Which is the best pricing strategy?
There’s no one-size-fits-all method for choosing the right pricing strategy. Value-based pricing can be an excellent choice if you have a unique, differentiated product. However, competitor-based pricing might be more effective for companies with more generic items.
