What is Value-Based Pricing?

The marketplace has become cutthroat, with new competition sprouting every day.

So, having a unique product that resolves customer problems isn’t enough. While it can make you stand out, setting the right price for your products or services can be the key to success.

Now, what if we told you that you can finalize your pricing based on your customer? Would you believe it? Well, it’s true. It’s called value-based pricing.

This pricing strategy revolves around understanding and leveraging what customers truly value. So, what exactly is value-based pricing, and how can it transform your business?

Let’s discuss this in detail.

What Is Value-Based Pricing?

The strategy of determining the pricing of a product based on how your customer perceives it is called value-based pricing.

Conventionally, the pricing is set either by how much it costs for development or what competitors are offering. But here, the pricing depends on how valuable the product or service is. If the product provides unique solutions and is highly beneficial, customers will be willing to pay more.

Here are some value-based pricing benefits to help you understand the concept better.

• You can charge more for the product. Therefore, higher prices and higher profit margins.
• The pricing will distinguish you from the competitors, making you stand out in the market.
• You can focus on the customer segment that values your product.
• It can reduce price sensitivity among users and improve their acceptance of high prices.

Now that you have understood the idea, the obvious question in your mind will be – how to calculate value-based pricing.

Value-Based Pricing Calculation

Unlike cost-based pricing, value-based pricing doesn’t have any specific formula to calculate them. The reason is that it solely depends on how customers perceive the product.

Though this is the case, there are some other ways you can determine it.

Identify Customer Segments

This is likely to be the base of every strategy. You need to know clearly who you are catering to. Find the following about them –

• Demography
• Occupations
• Lifestyle
• Age

Understand Customer Preferences

Once you have identified the target customers, understand them. You have to know –

• What are they looking for?
• What are the issues faced by them?
• What are the tools they are currently using?

Pro Tip: Use online survey tools like SurveySparrow to collect valuable customer feedback.

Analyze Competitors

Now, it’s true that while determining value-based pricing, you don’t need to look at how competitors are charging. But you will have to know you are providing better and higher quality service or products than they are.

So, do proper competitor analysis and identify the areas where you excel and also the areas where you need to improve. Value-based pricing is only successful if you have a quality product or service.

Determine the Willingness to Pay

This requires extensive market research. The best option here is to run focused surveys for your target audience. With tools like SurveySparrow, the feedback collected will be analyzed in depth to uncover hidden customer sentiments.

Set the Pricing

Here, you have to decide on the pricing structure you want for your product. For example, the pricing of your product or service will be lower for customers in India than in the USA.

Evaluate and Adjust

It’s necessary to constantly monitor and evaluate the pricing structure. You can do this by monitoring the sales and customer feedback.

A post-transaction survey could do the trick in clearly identifying whether the customers loved the pricing or not.

Value-Based Pricing vs Cost-Based Pricing

Since you have a basic idea of what value-based pricing is and how it’s determined, let’s start by introducing the latter.

So, What is Cost-Based Pricing?

It costs you $100 for your product, and you want 20% profit for it. So, the pricing you will go for it is – $120. This is essentially cost-based pricing. It’s based on the cost incurred to produce and deliver a product.

The cost of development can include labor wages, materials, overheads, and more.

Comparison with Value-based Pricing

However, when it comes to value-based pricing, the cost will be based on how beneficial the product is.

For example, suppose you have developed a software product. Upon research, you understood that your software can save companies potentially $200,000 annually. Therefore, building on this, you could charge your software $20,000 per year.

You can argue that the pricing is only 10% of the annual savings the product helps with. To give you a clear idea of the two topics, kindly refer to the following image.

How to Do Value-Based Pricing?

As you may already know, it takes a considerable amount of time to determine value-based pricing. That’s why you need to have proper value-based pricing strategies set in place.

The following lists the strategic approach to help you with pricing.

Step 1 – Customer Research

The cornerstone to building this pricing strategy is understanding customers and their preferences. As a result, you need to conduct proper market research.

Leverage the power of surveys to gather customer feedback and analyze them to understand the behaviors. You can then segment them based on similar characteristics. Give importance to that segment that is interested in what you are offering.

Conjoint analysis can also be helpful.

Step 2 – Competitor Analysis

This is the same as we discussed earlier. You need to compare the product’s value with those of the competitors. The ultimate aim here is that your product has to provide greater value than competitors.

How can you do this? Ask yourself questions like the following –

• Does my product offer more value for the price than competitors?
• Is my product priced competitively compared to the market average?
• Are the manufacturing processes I used more cost-efficient than those of our competitors?
• Does my product offer any unique or superior features compared to competitors?

The answers to the question will shine a light on whether your product is eligible for value-based pricing.

Step 3 – Market Analysis

Market conditions are prone to change. Therefore, it’s only logical to keep an eye on those market conditions that can affect the pricing strategy.

Try to understand the buyer power, supplier power, competitive rivalry, and more and be informed. Furthermore, be ready to adapt to the changing market.

Step 4 – Calculate the Value

To calculate the value, consider converting the benefits of your product into monetary terms.

Remember the example we discussed in the previous section? That’s one way to go about it. You have to consider benefits like cost savings, risk visibility, and time-saving and use them to decide on the pricing.

Step 5 – Test the Pricing

Once you have set the pricing, do a test run. Introduce the pricing to a selected few in the market and gather feedback. Do proper feedback analysis and use them to refine your pricing.

It’s hard to get it right from the get-go, so fair warning – be prepared to make needed adjustments.

The Pros and Cons of Value-Based Pricing

Like every pricing strategy, this also has its ups and downs. Let’s have a look at them.

Pros of Value-Based Pricing

• With this approach, you can charge higher, meaning higher profit margins.
• You will need to do a deeper customer analysis to set the pricing. Therefore, it’s possible that your product offerings and pricing will be heavily customer-focused.
• Stand out from the chaos of the market for your customers.
• Low competition with respect to pricing.

Cons of Value-Based Pricing

• Extremely time-consuming
• Complex method to implement pricing
• Needs adjustment as the market needs changes

Value-Based Pricing Examples

A lot of companies have adopted this kind of pricing. The following are some of the top brands you might already know that use this pricing strategy.

1. Apple

I don’t think this brand needs any introduction. And it’s possible that you might already know that they use value-based pricing. If not, now you know.

2. McKinsey & Company

Yet another renowned business that uses this pricing strategy. If you didn’t know – McKinsey is a leading consultancy. They employ pricing by charging clients based on the potential value and benefits their services deliver. Their value proposition includes revenue increases or cost reductions.

3. Louis Vuitton

If you are keen on fashion, then it’s possible you have heard about Louis Vuitton. This luxury brand also follows value-based pricing for its products.

These are few among the many brands that employ this kind of pricing strategy.

Build Effective Value-Based Pricing With SurveySparrow

Surveys are a great way to understand what’s on the minds of your customers. And you need to know this if you have to follow value-based pricing for your product.

SurveySparrow can help you here.

The tool is renowned for its conversational interface that yields more survey participation and responses. It offers advanced analytics options to get the most out of customer feedback. The 1000+ templates it offers will give you a boost in survey creation.

Furthermore, it can help you –

• Reach customers where they are and collect feedback.
• Identify how your product offerings fare against the competitors [customer POV].
• Track shifts in customer preferences and market conditions.
• Gather feedback on whether the customers are satisfied with your pricing [post-transaction surveys]

These are just the tip of the iceberg. SurveySparrow can do more and aid you greatly in your path to deciding value-based pricing. If you are interested in implementing this type of pricing strategy, then start your market research with SurveySparrow.