Pricing of your products affects your profits and your sales volume. One of many pricing strategies is value pricing, which refers to setting your price based on what customers are willing to pay. The name comes from the idea that the price of a good or service is set at the customer’s perceived value of what’s being sold. Value pricing doesn’t factor in the cost of the product or competitor prices. The goal of value pricing is to set your price as high as possible while driving away a minimal number of customers.
Where Value Pricing Works
Value pricing usually applies to a specialized good or service that creates favourable 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. Golf drivers designed to carry a golf ball further can be priced higher because of the favourable condition for the customer. Value pricing also applies to industries where customers are very averse to unfavourable conditions. One example is the court system, where clients are willing to pay higher prices for lawyers to avoid legal penalties. The perceived value of hiring a great, specialized lawyer means defense lawyers who take on those cases can charge more.
Benefits of Value Pricing
Unlike other pricing models, value pricing doesn’t force you to charge a price close to the product’s cost or what a competitor’s charging. That means value pricing gives you more flexibility regarding the product pricing structure. Incorporating value pricing doesn’t require research on materials costs, labour costs, overhead allocation, or competitor actions. It also has the potential of a greater impact on net income than other pricing strategies.
Value pricing overlaps multiple business departments and motivates businesses to offer the best products possible. Because the goal of value pricing is to maximize the value of one product over another, using 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. Companies that use value pricing often employ customer surveys, discussions, interviews, or feedback, which help promote interaction with customers and foster brand loyalty.
Impact on Net Income
The success of your pricing model strategy directly impacts your net income. While other pricing strategies limit potential revenue based on expenses or competitors’ prices, value pricing gives you unlimited potential on revenue opportunities. Your company’s brand recognition, product distinction, and perceived value to customers drive your net income.
The effectiveness of value pricing can also depend on the next-best product or service on the market. If the closest product or service is very similar to what you offer, value pricing has minimal impact because there’s little perceived additional value to the customer. Many customers may spend less on a product that’s similar if your product doesn’t offer much higher perceived value. Products that are distinct have a greater value-pricing impact on net income.
Hurdles of Value Pricing
It’s important to look at the two major hurdles of value pricing to ensure the benefits are worth it. Value pricing requires an extensive amount of information and research. Value-pricing strategies are based off of customer experiences and market conditions. These items fluctuate constantly, and it’s 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’s still up for interpretation by customers.
How to Implement Value Pricing Strategy
To use value pricing, you first need to offer a unique good or service. Value pricing is only effective if customers can distinguish the increased value of what you offer compared to your competitors. This difference creates the element of perceived value. Communication is key to demonstrate value to customers. Before pursuing value-pricing strategies, it’s a good idea to evaluate how your product line compares to the market and how to articulate this to potential customers. It’s a good ideal to anticipate customers’ questions regarding your high price point, and have answers ready for them.
Another important aspect of incorporating value pricing is the lack of a fixed-equation model. As an example, a cost-plus pricing strategy combines all product expenses and assigns a mark-up percentage. Value pricing, however, requires a substantial amount of research, because each product is different and each industry is treated differently by consumers. Seeking expert advice on value pricing whenever possible helps you learn more about changes in market approaches and strategies.
No matter how you price your goods, watching your profits helps you make informed decisions, allowing your business thrive. Using an accounting system, such as QuickBooks Online, you can generate a Profit and Loss statement automatically. Learn how today.