The Highs & Lows of Value-Based Pricing

Previously, we’ve covered 7 of the major pricing strategies that you can implement in your business, and how implementing some of these strategies can help boost your profits, with little to no investment.

If you’re skeptical about the value of pricing strategies: did you know that just by making slight changes to your product’s price, you can increase your profits by 20%-50%? We’re not talking about simply raising your prices (Although that’s one of the strategies), but your price reveals a lot about your product, rather than just how much it costs

It’s time to dive a little deeper into the product pricing strategies, starting with value-based pricing, one of the more unique pricing strategies, but one that can help you achieve some of the highest profit margins if you play your cards correctly.

What is Value-Based Pricing?

There are essentially two versions you can use when you’re trying to implement value-based prices.

Typically loved by SaaS businesses, value-based pricing is when you allow your clients to determine how much your product is worth, having them set the price according to the value they receive from it.

If this is enough to turn you off from this strategy, you’re not thinking big enough. If you’re offering a new service in a field that has its own competitors, you’ll be able to do your own market research and add something that other businesses have failed to take into account.

While most market research has you take a look at your customer segment, identifying their pain points, buying power, and spending habits, you’ll be able to leverage one more point, which is their perceived value.

Alternatively, value-based pricing is also known as the perceived value pricing strategy, this school of thought is more for people who are selling physical products, rather than services.

It has you do all of the above, but you have a set price based on the perceived value of your product. You might even have a higher price than your competition. The thing is, the higher the value of your product, the more people are willing to invest.

What are the Advantages of Value-based pricing?

You’ll Be Able to Raise Your Prices Confidently

You can take an active hand at giving your product a higher value by justifying your price with the fact that you’re offering an objectively better product than any of your competition.

As long as you have tangible, distinct features that aren’t false promises, you’ll be able to offer a higher-valued product even if your quality doesn’t match up to your competition.

Possibly the best market penetration pricing strategy

When you’re in the researching phase for your product, you can highlight the pain points of your potential customers.

This allows you to craft your service in a way that directly appeals to your ideal client. Secondly, since you’ll probably be directly in contact with your prospects, and will be able to have a unique advantage…

Your advantage would be that you can differentiate your product in a way that directly boosts your price since you won’t just be figuring out all the kinks of your product. In addition to highlighting the pain points your product solves, you can directly bring up points that your consumer segment attaches value to.

You’ll Be Able to Guarantee A Stronger Bond with Clients

Your clients will see that it’s in their best interests to invest in your product or service, simply because you offer them something that they haven’t found in any of your competitors: Value.

Unlike other brands, your selling point isn’t that you’re the cheapest or the most expensive, it’s that your product will give your target customers the highest value they can find on the market, since money is an exchange of value, the higher the value, the higher the profits.

Also, since you’ll be giving them the reins of figuring out the price with value-based pricing, they’ll find that you’re developing quality products and will trust you more for your confidence.

Loyal customers are more likely to be repeat buyers and would likely recommend your product to their friends and family. If you’re interested in learning more about how loyal fan communities can help your business, take a look at our “6 Benefits of A Loyal Fan Base and How to Cultivate One”.

Essentially, your clients would feel like they’re part of the process and are more likely to give you constructive feedback that helps you improve your product; just by asking for their feedback directly, you’ll help them feel valued.

What are the Disadvantages of Value-Based Pricing?

You’ll Be Heavily Reliant on Your Competitor’s Price Points

In a monopoly, value-based pricing wouldn’t exist. Even if it did, it’ll be useless simply because your customers wouldn’t have a choice when it comes to your product.

The value you attach to your product can be directly related to the value your competitors are missing, and that’s how you can justify your price point.

The thing is, if your competitors are offering their products at a low price point, it becomes difficult to offer a higher price, simply because your audience wouldn’t feel the need to invest.

The only way you can justify a higher price point is if your product shines so brightly above the competition, that you’ll make it seem like you’re losing out by giving it at such a price.

Profit is Usually Inconsistent

While other businesses with a set price are able to determine their average monthly revenue accurately, you’ll be stuck with constantly implementing new features that can raise the value of your product in order to reach adequate sales.

In addition to that, you will always need to incentivize your clients, even the loyal ones with promotions and discounts, otherwise, they’ll start comparing your product with other businesses that can offer them discounts.

At your price point, they might not feel that the value you offer will beat the 30% off holiday discount of your competitors, this will allow you to lose out on customers, which can weaken your profit margin.

It’s too Rigid

Value-based pricing, is as the name implies, solely based on the perceived value of your product. This means that it doesn’t take into account the production cost, labor costs, or consumer demand.

This can actually isolate you from the market as it doesn’t give a holistic view of the competitive landscape. if all you’re leveraging is perceived value, it’s going to be difficult to sustain a uniform production line.

Value-Based Pricing is Hard to Keep up

The problem with value-based pricing is that you have online stores such as Amazon that regularly host discounts and promos with heavy discounts.

You might be selling an objectively higher product. Still, if your customers find that they can get your competitor’s version with added accessories for the same price, their perceived value will change from higher quality to better value for money.

In addition to that, you’ll need to be constantly justifying your prices, since the only constant in the market is changing, you’ll have a long journey ahead of you if you’re trying to justify a stable price point.

Also, adding value to a product is entirely subjective, your product might only be appealing to a certain segment of society, alienating you from other potential customers and making it difficult to scale.

How Can You Use Value-Based Pricing to Your Advantage?

Know your direct competitors and assign value to counter them with your product.

Find Your Ideal Consumer Segment

Before you start knowing who your competitors are and how you can stand out from the crowd, you need to understand that it all starts with researching your potential customers.

Take a deeper look at their demographics, income, and spending habits, you might even do focus groups with your target audience segment if you want to read more than just stats.

What you’re looking for at this stage is what exactly motivates them to buy what they buy, you can make a survey in order to have a uniform statistical document that will help you with creating your product.

Identify Your Direct Competitors

Now that you have all you need from your potential audience, it’s time to take a look at who’s been marketing them all this time.

Find out which competitors are offering products that are similar to yours, your competitors are going to be your #1 reference when it comes to value-based pricing, not your consumers.

That’s because, without competitors, you’ll never have something to justify your price point, which is why you need to know exactly what they’re missing from their products.

Add Features That Your Segment Attaches Value to

It doesn’t end with just identifying the pain points and value-based key points, once you’ve finished the first two steps, you need to assign the value.

A pitfall you should avoid is when you attempt to assign value based on each feature of your product, you’ll never hear the end of it, and your product will end up being rigid.

You first need to use your competitors’ prices as a baseline and use that to enhance your product with all the extra value-based features you’re planning on adding.

We hope this article helped you figure out how value-based pricing can help your business! With cosmic, you’ll be able to get the services of a creative team of professionals that are interested in taking your business to planetary-level heights.