5 Common Misconceptions About Value-Based Pricing Strategy
You may have heard of value-based pricing and dismissed it off the bat. Perhaps it seemed too complicated, and it felt easier to cost your product according to more traditional rules. With innumerable eCommerce pricing strategies available to choose from, you could be forgiven for doing so.
But it may be time for you to think again.
Admittedly, value-based pricing isn’t for everyone. For example, depending on your industry, you may be better off selling products at a net price. But if you’re in the business of selling luxury, high-end goods, or offering customers unparalleled life experiences, it could be time to rethink how you cost them.
Value-based pricing is a strategy that puts the customer in the driving seat. Instead of evaluating the cost of production, this form of pricing is based on what the customer thinks your product is worth. It offers an analysis of the value your customer assigns to the product – or more specifically, the value of the differentiation features that make your product stand out from the rest. With this strategy, you always measure from the pricing of your most direct competitor and go from there.
Let’s take a very simple example. Imagine you are selling a television, with all the modern additions that come with it. Your competitor is selling almost exactly the same television and the only difference between the two products is that your television is larger.
With value-based pricing, you focus on this specific difference – in this case, the size of the television. You work out the specific value of this differentiation feature, meaning how much benefit it affords your customer in terms of convenience, luxury, utility, and more.
The key here is amping up the customer research – no guessing what your clients think! This is where CI (customer intelligence) comes in; it’s a method of compiling all data about any past, future, and potential customers and it’s invaluable, to say the least. ‘All data’ means exactly that – what customers think of your company, what they require from you, their price range, et cetera.
Once you’ve evaluated the value of the specific feature, you convert this into an actual price. How much is your customer willing to pay for this extra feature? What is it worth to them? (Clue: don’t skimp on the customer research here either!). And for the final step? You simply add the cost of this feature to the original cost of your competitor’s product.
It may sound like a simple strategy, but value-based pricing involves large amounts of research, resources, and dedication. For this reason, it is often shunned by businesses, which may have led to the myriad of misconceptions surrounding this strategy.
It’s time to untangle them. Let’s figure out fact from fiction, so that you know just how effective this pricing strategy is.
Misconception 1: Guaranteed success
There are many who don’t engage with value-based pricing, partly due to its apparently complicated nature. Yet there are some who go in the other direction and embrace this pricing strategy as the fabled path to all glory and success.
Such an approach is replete with misplaced and unfair expectations. This pricing strategy is effective if you get it right – there’s no doubt about that. However, managers expecting sales to go through the roof once they’ve calculated that all-important differentiation value may be sorely disappointed if they forget to take into account one simple thing.
This pricing strategy is based on how your competitor has priced their product. If you work with luxury and high-end products, there is every chance that the competition offers a workable and fair price range. But even so – what if they have massively undersold their product?
In this case, you will be working from a similar price point, and that carefully worked-out differentiation price will have a much hollower impact. Keeping up with market research trends is a smart way to keep ahead of the game here, to avoid such pitfalls.
Suffice it to say, value-based pricing is dependent on intelligent pricing by your competitor. Because of this, it’s vital to start your research with your competitor’s pricing strategy before you even begin to look at what your customer thinks.
That’s not to say, of course, that the customer doesn’t matter at all. In fact, with customer experiences plummeting since the pandemic, it’s important for all businesses to pick up their feet and focus on improving post-covid customer experiences. You just need to make sure you don’t miss out on the first step before you move on to guaranteeing a first-class customer experience.
Misconception 2: Guaranteed success part 2
So you’ve analyzed your competitor’s pricing. They offer a product for a fair and competitive price, allowing you to simply add on the differentiation difference, and be on your merry way.
And then you simply sit back and wait for success. Right?
Not quite. Not always! There are many other factors that come into play here. For example, is the feature you’re offering actually worthwhile? Is it worth customers digging deep for? Have you actually produced a valuable and meaningful product?
Value-based pricing can be almost claustrophobic with its microscopic approach to a single feature. But don’t get too tangled up in the details. You need to remember to zoom out in order to get a full appreciation of just what you are offering.
Value-based pricing is not your knight in shining armor. It is simply an effective pricing strategy that needs to be applied intelligently and with a wealth of research to back it up. This is not a method for those who rest on their laurels – instead, you need to be constantly analyzing and evaluating.
Misconception 3: Every feature counts
This common misconception is thankfully an easy one to unravel.
With value-based pricing focusing on the specific features of an item, rather than the overall product, some have been led to believe that they have to calculate the value and price for every single feature that is on offer.
Let’s put this myth to bed. You do not, and should not, calculate the value and price for every single feature that your product offers. This would take an enormous amount of time and research and, more to the point, is completely useless.
The entire point of value-based pricing is to evaluate what a single feature offers. This feature carries the product for a specific segment of customers, and it is what they are paying for.
This is already a strategy that takes some time, so don’t overcomplicate things. Keep it simple and only focus on one feature.
Misconception 4: Brand value counts
With this form of pricing strategy being applicable in mostly high-end, luxury markets, you could be forgiven for thinking that the overall brand image is calculated into the price too.
But this isn’t true. Value-based pricing looks solely at the differentiation feature, and nothing else. Your brand may be dripping in esteem and reputation, but if a competitor is selling a better product than you, then it doesn’t matter.
Your brand name is not enough, in this scenario, to carry you along. With value-based pricing, it is the product and the all-important features themselves that get the spotlight.
With that said, the brand appeal isn’t completely insignificant. In fact, this strategy can even help strengthen brand value. As it’s customer-led, it can improve customer relations, which can lead to great customer service review examples. In other words, let your products do the talking for you with this strategy, and let success trickle down into other areas.
Misconception 5: Short-term success wins
It can be easy, as with all pricing strategies, to think that the price that results in the most immediate sales is your best bet.
But you have to think long-term. Will customers still be buying this product, for its specific feature, in the future? Will the differentiated feature even matter a few months down the line? Where do discounts, promotions, and price hikes come into play? Smart businesses also need to be sensitive to contemporary inflation-led cost hikes across all industries and adjust prices accordingly.
It can help here to keep a forecast inventory. Having a clear overview of what products you’ll need and when can be crucial when applying pricing strategies in the present, for obvious reasons.
As we noted above, it’s important to zoom out when it comes to value-based pricing. Think long-term, and your future self will thank you.
The future is customer-led
Value-based pricing is not only valuable for the increased revenue it can bring you.
This strategy can be part of a wider customer service objectives and strategies plan. Not only does customer research around the price point help cement deeper relationships and instill brand loyalty, but it is also a reminder for businesses to reset the focus on who really matters – the people buying their product.
Allow yourself to be led by this. What else does the customer want? What is their overall experience with your company?
Understanding exactly how you provide value to the customer can lead you to a deeper analysis of how your company operates, which is invaluable information. It can help you evaluate what areas you need to work on. Combine this with business process mapping, where you work out what activities and processes are the core of your business and commit them to paper, and you’ll have a blueprint for efficiency and success for your company.