If you are a small business owner in an industry where you have options when pricing your products and services, then you may have heard about value-based pricing. Value pricing can be the most profitable way to price your offerings because the margins tend to be very high. Unlike cost-plus pricing, basing your prices on value allows you to set your prices with no relation to the cost of delivering the product or service. Instead, it’s based entirely on the benefits your offerings provide the consumer.
Let’s explore how to make value-based pricing work for your business.
Clients First, Please
Value pricing has everything to do with how the client or customer values your product or service, and that’s where we need to start. Value pricing varies from customer to customer since everyone values things differently. It must be done “manually” through interviews and other face-to-face methods.
A seller using value pricing must rely on good communication and interviewing skills to arrive at a price based on feedback from potential buyers. There must be great trust between the two parties to start with, as both must be quite honest with each other for value pricing to work.
A competent seller using value pricing will ask the prospect what results they want to see from the purchase. The results will be a combination of quantifiable dollars saved or gained, such as headcount reduction or increased sales, plus intangibles such as peace of mind, improved reputation or reduced risk.
As an example, let’s say we come across a prospect who is doing all of their accounting by hand. It’s taking two bookkeepers now to keep up with the paperwork. A skilled accountant knows of a system that will save them time and money. The accountant and the prospect will need to work out what the savings will be if the new system is installed. The accountant can then charge his or her client based on a fair percentage of the amount of savings gained in headcount reduction, which should be substantial and which the prospect values.
The final price can be increased if the prospect also values certain intangibles that will be realized when the solution is implemented. The seller should also include savings of the manager’s time, increased internal control, reduced payroll taxes and many more details that make up the benefits.
Value Pricing Is Not Luxury Pricing
Just because you have high margins when pricing your products does not mean you are value-pricing them.
Many people say they are using value pricing when they are simply choosing a high markup for their products or services. If a price is based on cost, even if high margins are present, it’s not value pricing. It’s cost-plus pricing instead, with a very big plus. The good news is that high margins are always a good thing, whether you are value-pricing or not.
When Can You Use Value Pricing?
In value pricing, there should be sufficient leverage in the transaction so that both parties are largely better off by the deal. And that’s the biggest limitation of value pricing: You must have substantial payoff on both ends for it to work.
Value pricing works well in large companies. Leverage is present when a service or product can be applied to thousands of employees or across hundreds of locations, and the cost can be spread effectively across them. But it can also be used in small companies where the cost of an item is low and the benefits are much greater.
Now that you know about value pricing, can you apply it to your industry or with your products and services? If so, give it a try and see what happens.