Value pricing is the practice of setting the price based on what customers are willing to pay. This technique derives its name from the concept that the price of a good or service is set at the customer’s perceived value of what is being sold. Value pricing does not factor in the cost of the product or competitor prices. The goal of value pricing is to charge as high of a price as possible while driving away a minimal number of customers. This inverse relationship is structured around how customers perceive the good or service.
Where Value Pricing Is Applicable
This strategy is typically assigned to a specialized good or service that creates favorable conditions for the customer. For instance, an athletic clothing manufacturer can charge higher prices for its goods if its customers perceive the gear as more beneficial than other products. Drivers that have been manufactured to carry a golf ball further can be priced higher because of the favorable condition for the customer. Value pricing is also applied in industries where customers are averse to unfavorable conditions. An example is the court system as clients are willing to pay higher prices for lawyers in an attempt to avoid legal penalties. The perceived value of hiring a great, specialized lawyer permits the service to be charged at higher prices.
Benefits of Value Pricing
Unlike other pricing models, value pricing does not restrict a company to charge a price close to the product’s cost or competitor pricing. Therefore, value pricing permits management to have more flexibility regarding the product pricing structure. Incorporating value pricing does not require research regarding materials costs, labor costs, overhead allocation, or competitor actions. It also has the potential of a greater impact on net income than other pricing strategies. In addition, value pricing overlaps multiple business departments and forces a business to attempt to offer the best product it can. Because the goal of value pricing is to maximize the value of one product over another, utilizing this pricing strategy tends to help a business develop a higher-quality, more-useful product. Finally, value pricing places heavy emphasis on the customer, and this positively impacts a company’s reputation. It requires customer surveys, discussions, interviews or feedback, which are actions that promote interaction with customers and the fostering of brand loyalty.
Impact on Net Income
Net income is directly tied to the success of a pricing-model strategy. While other pricing strategies confine potential revenue based on expenses or competitors’ prices, value pricing places unlimited potential on revenue opportunities. The impact on net income is in direct correlation to a company’s brand recognition, product distinction, and perceived utility of customers. A customer’s psychology of pricing drives the limit to what a company can charge.Value pricing’s impact on net income is also heavily reliant and contingent on what next-best product or service occupies the market. If the closest product or service is very similar to what is being offered, value pricing has little impact because there is little perceived additional value to the customer. Materially distinct products have a greater value-pricing impact on net income.
Hurdles of Value Pricing
Although value pricing offers substantial benefits, there are two major hurdles to face when incorporating this strategy. First, it requires an extensive amount of information and research. Value-pricing strategies are based off of customer experiences and market conditions. These items are always fluctuating, and it is impossible to precisely identify an exact price to use. For this reason, another challenge to value pricing is the uncertainty. While the price assigned to a good can be substantiated by research, it still up for interpretation by customers.
How to Implement Value Pricing
A major factor necessary for the implementation of value pricing is a unique good or service. Value pricing is only effective if customers can distinguish what is offered in excess of what a competitor is offering. This difference creates the element of perceived value that value pricing capitalizes upon. Therefore, communication is key to demonstrate value to customers. Before pursuing value-pricing strategies, a company should evaluate how its product line compares to the market and how to articulate this to potential customers. Another important aspect of incorporating value pricing is the lack of a fixed-equation model. For example, a cost-plus pricing strategy aggregates all product expenses and assigns a mark-up percentage. Value pricing, however, requires a substantial amount of research as each product is different and each industry is treated differently by consumers. For this reason, seek expert advice on value pricing whenever possible to learn more about changes in market approaches and strategies. For example, Ron Baker and Mark Wickersham, both experts of value pricing, will present at the Intuit Thrive Conference 2016 from Nov. 20-22. Capitalizing on an opportunity like this is the most effective way to learn more about how current value-pricing practices impact a company’s profits.