When choosing a pricing strategy, value-based pricing might seem like a high-risk option. There’s a lot of work that must go into determining value pricing, and your company will need to dedicate time and resources to it, but the payoff could make this strategy worthwhile to invest in. Businesses that use value-based pricing utilize input from their customers to set the right price for their products based on the customers’ perceived value rather than arbitrary profit margins or how their competitors price their products. Doing this results in happier customers, and usually a good profit margin for the business as well. Value-based pricing can work better for some types of products rather than others. If you think that value-based pricing could work for your business, read on to hear how to use this strategy to sell your products or services.
What is Value-Based Pricing?
Value-based pricing is a pricing strategy that utilizes customer-perceived value to determine the price of a product or service. As opposed to cost-based pricing or competitor-based pricing, which respectively use production costs or the price of their competitors’ products or services as a baseline for their pricing strategy, businesses that use value-based pricing rely on input from various groups of customers to determine how much to charge them.
Value-based pricing is commonly used for businesses in SaaS, fashion, pharmaceutical, events, and other industries where customer-perceived value plays an important part in companies’ pricing strategies. You can execute value-based pricing by surveying your customers to collect data, using the data to set your prices, keeping track of customers’ buying behavior, and adjusting the prices accordingly.
How to Use Value-Based Pricing
If you have the time and resources to do it, value-based pricing can be highly beneficial to your business. Focusing your customers’ wants and needs is important in all elements of running a business, and pricing is no exception. Value-based pricing will require some time for brainstorming, surveying your customers, and observing the results of your pricing strategy. It takes more work to use value-based pricing than it does to use other pricing strategies, but if you believe you have a product or service that brings your customers real value apart from anything else on the market, you should strongly consider using it. If you don’t know where to start when it comes to pricing the elements, follow the steps below to help you develop and implement your value-based pricing strategy.
1. Measure Customer Perceived Value
Customer perceived value is the amount of money your customers believe your product is worth. You can measure customer perceived value by segmenting your customers into different buyer personas and surveying each group about what they would pay for your product or service.
To determine buyer personas, look at the demographics your customers come from, including details about them like their jobs, income, location, etc. Then, think about why the customers are purchasing from your business. What value do you bring them and how does it benefit them in their lives?
Now that you know your personas, there’s only one way to find out their perceived value — by asking them. You can do this with a survey to find out how each segment of buyer personas would value your product. Include specific elements and special features of your product or service on the survey, especially the ones that you believe set you apart from your competitors. The feedback you receive will let you know how much your customers actually value those elements.
2. Determine a Price Based On Customer Perceived Value
After receiving and assessing the feedback from your customer surveys, the next step in a value-based pricing model is analyzing the data to determine the initial value-based prices you will set.
While value-based pricing is different from cost-based pricing, you will still need to cover the costs of production with your prices. With that in mind, choose an appropriate price for each product and each buyer persona you surveyed. Using the median price, or the most common price for each product or feature is an effective method. If you’re using a customer-forward approach, you may need to adjust certain aspects of your business if you want higher profit margins from your value-based prices.
3. Implement Value-Based Pricing
It’s time to go live with your pricing strategy. Make your product available at the new prices you’ve determined on your website. Whether you’re pricing a brand new product or using a new pricing strategy for an existing product, you should consider running a marketing campaign to make your customers aware of the new prices and any other features or new pricing tiers you’ve added.
Make sure you’re prepared to collect more data on how well your products or services are selling at various prices so you can make adjustments if needed. It’s important to continue listening to and observing your customers to meet their pricing needs.
4. Analyze and Adjust Your Prices
You may find that your initial value-based pricing strategy isn’t working as well as you hoped it would. That’s okay — because it involved feedback from customers, which can be hard to assess. It’s hard to get value-based prices right on the first try. Use trial and error to keep track of what’s working and what needs improvement. Consider changing the prices based on how well your product is selling to the different personas you’ve set. Keep analyzing your data and making adjustments accordingly.
You could also A/B test your value-based prices using different marketing campaigns. You can segment your email marketing or remarketing lists to match your customer persona segments, then send emails with different pricing offers to the same personas. This will give you a good idea of which price will work better.
Don’t be afraid to continue surveying your customers — it’s a good practice no matter what kind of pricing strategy you’re using, but because value-based pricing is so focused on the customers and what they are willing to pay, it’s always a good idea to solicit their feedback.
Value-Based Pricing vs. Cost-Based Pricing
Cost-based pricing is sort of the opposite of value-based pricing — it’s based on the cost of production (and distribution if you count shipping/fulfillment and don’t charge separately for those things). This might seem obvious, but cost-based pricing is not an effective way to price non-physical products like software and webinar tickets, or low-cost products like food at a restaurant, live events, and real estate. That’s because the cost of producing those things can be significantly lower than the price that customers value them at.
Using cost-based pricing, you simply cover costs and decide how to price your product based on the profit margin you want to see. This strategy does not take into account what customers think about your product. It could work for some industries, especially those that deal in essential goods, but not for other industries like software or luxury goods. The latter industries typically have higher profit margins that are not so tied to costs. To quote an old adage, the customer is always right — so if you go by this rule, a value-based pricing strategy is the way to go.
Value-Based Pricing vs. Competitor-Based Pricing
Competitor-based pricing uses the prices of your competitors’ products or services as a baseline for the prices you set for your own business. Using this method, you would take into account the different features offered by your competitors along with the prices of each feature, and compare them to your own. The prices you set would be comparable to your competitors — usually slightly higher or lower.
One issue with competitor-based pricing is the risk of assuming your competitors did sufficient research and are offering the right prices. Your prices could end up being too high or too low because you went off of your competitors’ business model instead of your own. This is especially detrimental if your costs are higher than your competitors’ but you set similar prices, causing you to make less of a profit. Instead of simply copying your competitors, using a value-based pricing model allows you to be a disruptor, setting the bar with your prices based on real feedback from your customers. The extra work could prove worth it in the long run.
Value-Based Pricing Examples
Value-based pricing is exemplified in several different industries. Its customer-forward approach is widely applicable, whether it pertains to designer fashion or B2B software. Businesses of all sorts use value-based pricing to their advantage. Below, we’ll take a look at two examples of value-based pricing strategies.
Example 1: Asana
Asana is a good example of a B2B software service that utilized value-based pricing to reach different buyer personas at different price points. The prices range from free to $24.99 per month for the Basic, Premium, and Business pricing tiers, with another Enterprise tier that is priced by the individual business. As you go up each tiers, the price goes up with the number of available features and level of access offered to customers. See the pricing options below, with suggestions Asana included based on the buyer personas who the company thinks should purchase each option.
At the Basic tier, which is meant for individuals or small teams just starting out, users get all of the baseline features of Asana that a single person or just a few users would need. Tasks, projects, activities, overviews, briefs and other useful features of the project management platform can be accessed for free, but can only be shared amongst 15 people at the basic level. Asana uses the customer-percieved value of additional access and management features to price its product at each tier. As you can see in the table below, each level has additional features that add value to the software.
The features included at the Premium level, like dashboards, custom fields, forms, private projects, and an admin console expand the capabilities of the software to a level more suitable for a small to medium-sized business. Asana estimated the customer-percieved value of these features to be $10.99. The additional features included at the $24.99 Business level include advanced integrations and added organization functions meant to help several teams work together. At the Enterprise level, users get priority customer support, more security, custom branding, and other features. The pricing for this tier starts around $34.99 and goes up according to the value-based price of adding additional teammates.
Example 2: Dr. Martens x Rick Owens
While designer shoes are a much different product marketed to a much different audience compared to Asana, value-based pricing is still an effective strategy not only for the company selling the product initially but for sellers in the resale market as well. When Dr. Martens released a new boot design in collaboration with Rick Owens, a fashion designer with a cult following, they knew the product would sell out quickly. Fans of both brands quickly bought the boots in less than a day and had no problem buying at the initially high price point of $330. The shoe company knew that the customer perceived value amongst the buyer persona interested in a fashion collab product would be a price much higher than other boots for sale on their website.
While many of the pairs of boots sold went to happy customers, others quickly appeared for sale on resale websites like eBay and Grailed. Sellers on the resale market price the boots even higher than their initial price, because buyers value the rarity of the product and are willing to pay the price to get their hands on them.
Value-based pricing is the best way to price your products or services if you want your business to take a truly customer-forward approach. When customer perceived value is what sets the price, other business operations fall in line. Rather than using cost or competitor pricing as a baseline, businesses that use value-based pricing continually listen to feedback from customers. They can rest assured that their prices are within the range that targeted buyer personas are willing and able to pay.