What Is Value-Based Pricing? (Benefits And How To Use It)
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Value-based pricing is a strategy companies use to determine the price of their products. It sets prices based on a customer's perceived value of a product or service. Learning about this pricing model and its benefits can help you implement it in the company you work for and improve brand perception. In this article, we define value-based pricing, share the features and benefits of this strategy and offer an example scenario.
What Is Value-Based Pricing?
Value-based pricing is customer-centred strategy companies use to determine the price of their products or services by assessing how much customers think they are worth. This strategy focuses on how consumers assess a product or service rather than the cost of producing or marketing it. It is an effective method for increasing sales and customer loyalty and is often found in markets that offer experiences or enhance a consumer's self-image, such as the automotive industry.
To use a value-based strategy, a company typically possesses these three qualities:
Offers unique products: A company often wants to differentiate itself from its competition and offer consumers something exclusive. This increases the desire for the product and encourages consumers to value it more highly.
Creates a customer-based product: Developing a customer-based product means customising the goods or services to meet customers' needs and desires. A company can develop this type of product by adding customer-requested features.
Provides high-quality products and services: The quality of a product is important because high-quality products hold a higher value for many people. High-quality items and services can also help a company be unique.
The Importance Of Value-Based Pricing
There are many beneficial reasons for engaging in this pricing method, including:
Achieving customer satisfaction
By pricing products and services according to how customers value them, a company can increase customer satisfaction. When consumers pay a fair price for a high-quality item, they are more likely to be happy with their purchase. It also shows consumers the company values their opinion.
Improving brand perception
Establishing a good reputation for the company brand is important for making sales and creating loyal customers. This pricing strategy helps build a brand with a positive reputation because customers gain satisfaction from purchasing the products or services and are likely to buy again. Improving the perception of a brand is a good marketing tactic that attracts new customers and helps companies appear distinctive in the market.
Building better customer relationships
Another benefit of this pricing strategy is that a company can build more meaningful customer relationships. Getting a product for the price they want to pay encourages customers to become loyal to the brand. Adding customer-requested features to products or services also helps build strong customer relationships. Ultimately, positive customer relationships lead to increased sales and greater profits.
When a company prices products according to how customers value them, it can often sell more. Price is usually a primary concern when making a purchasing decision, but this pricing strategy helps remove this obstacle for consumers. In combination with the other benefits of this strategy, such as high customer satisfaction and strong customer relationships, companies can see increased sales.
How To Create A Value-Based Pricing Strategy
Use these tips to help you follow this pricing method:
1. Focus on one factor
To create a strategy, companies analyse the market. They often choose one factor to study for the pricing analysis so they can focus on their results and have concrete data points. They may look at the type of consumer or demographic they want to target, or they can look at the type of product or service they want to provide. For example, a company can focus on teenagers who want to purchase athletic shoes rather than all people looking for shoes. Another example is focusing on SUVs with backup-camera technology rather than all SUVs or all cars.
If there are multiple factors to consider, such as the demographics of teenagers and the athletic shoe market, a company can conduct an independent study for each one to maintain focus. It can choose to use both data sets when determining its final value-based price.
2. Assess and measure customer value
Assess the value customers place on the product or service by requesting feedback, issuing surveys or studying the sale of equivalent products. Companies measure the customer value of their product by researching consumer behaviours that relate to other purchases from the company of comparable products. For example, if a company wants to price athletic shoes, it is helpful to research how much customers pay for similar shoes and review the prices of the ones it already sells.
3. Assess the competition
A company can assess its competitors by researching what they charge for their products and how consumers feel about those prices. Offering a higher quality product or a better price than the competitors may help with acquiring customers. Assessing the price range of a comparable product on the market is also important because customers often want the best price possible.
4. Assess the company's means
When pricing a product or service, consider the cost of producing and marketing that item. To make a profit, companies want to sell a high volume of units. With this strategy, a company could lower the product price below the cost of production but gain some benefits, such as customer satisfaction and loyalty. The company can make a profit by selling other products and services.
5. Analyse the data
After collecting data about the market, target audience, competitors and the business's capabilities, a company can analyse the data to determine the best price for the product or service. It can use software to condense data and identify patterns, such as purchasing trends. This data typically reveals how customers value the products.
Related: 10 Valuable Data Analysis Skills
6. Have a unique product or service
Ensure the product or service is unique. Special products are likely to gain the perception of having a higher value. If a company offers something exclusive, customers may value it at a higher price, allowing it to sell at a higher cost. This helps set the price for the product or service. After setting the price, companies pay attention to consumers' reactions so they can adjust the price as needed.
Example Of Value Pricing
This strategy influences industries like fashion, name-brand pharmaceuticals, personal care, travel, automotive and cosmetics. The following example shows a fictional business scenario that uses this pricing strategy:
New Horizon's Beachfront Resort offers five types of rooms: single queen, double queen, single king, double queen suites and single king suites. The single and double rooms include beds, a television, a chair, a dresser, two lamps, a phone and a bathroom. The suites have the same amenities as the basic rooms and a separate room with a sleeper sofa, a second television, a DVD player, two more lamps, a kitchenette with appliances and a guaranteed oceanfront view. During spring break, New Horizon wants to rent out all its double queen suites. To do this, they follow these steps:
Choose a target audience. Since it is spring break, the company chooses consumers who are in their teens and twenties.
Assess the audience. They do this by putting out a poll on its website and social media channels, asking potential visitors what factors are most important to them when booking a room for spring break. The results show customers want multiple places to sleep, a microwave, a coffee pot and an oceanfront view.
Research other hotels. The company conducts research regarding the amenities and advertised prices for double queen suites at hotels on the boardwalk. It finds New Horizon is one of three hotels offering a chair and a couch in its suites, the only one that guarantees an oceanfront view for suites and that other hotels charge between ₹135 and ₹220 for comparable rooms.
Value the added amenities by their importance to consumers. Having eight places to sleep can equate to adding ₹50 to the base price of the room, another ₹ 20 each for the microwave and the coffee pot and an additional ₹40 for the oceanfront view.
If the original price of the room is ₹130 per night, it can perform the following calculation:
₹130 + ₹50 + ₹20 + ₹20 + ₹40 = ₹260
Therefore, the value-added price for a queen suite during spring break would be ₹260 per night.
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