Value pricing strategy12/9/2023 ![]() It provides real willingness to pay data. In the end though, you have the greatest amount of data to make an informed decision about your profit maximizing price (unless you’re in a market based pricing situation, which will talk more about tomorrow). You’ll also need to conduct an analysis of competing goods, because once you have the data, you’ll want to know the other options consumers have open to them. ![]() Value based pricing models and software utilize customer data, as well as breakdowns of the relative value of different features within your offering. Plus, unlike pricing done by market norms, this method focuses on isolating qualities that distinguish the product in question from the 85 look a-likes on the market. However, unlike cost plus and competitor based pricing, it is impossible to fabricate a number that correctly reflects how consumers feel. Value based pricing requires a lot of research, which is right up there with working overtime while your friends are at the bar (or just bring the work to the bar). Newsflash: customers don’t care how much something cost you to make or your competitors, they care how much value they’re receiving at a particular price. Instead, people in charge of pricing justify price points based on internal reasons or simply adopting existing market prices. Unfortunately, the most common pricing strategies and methodologies forget about the customer. Essentially, value based pricing cuts through the red tape of this scenario to determine the true willingness to pay of a target customer for a particular product. My willingngess to pay is contingent upon the value I place into the product I want and need, which depends on hundreds of different aspects of my psyche and situation. If I only cared about covering my head, Goodwill would win, but since I care about my fashion sense, Macy’s wins. For example, if I needed a new winter hat, I could get one from the local GoodWill store for a dollar or I could go to Macy’s and buy one for $25. To consumers, price is a numerical evaluation of how much they value what you are selling. Value based pricing: It's all about the customer (and the benjamins) To understand value based pricing, let's take a look at what value based pricing entails, uncover the methodology's pros and cons, before exploring who should and shouldn't utilize value based pricing. Yet, like all methodologies, it has some quirks. Fortunately, value based pricing, when done correctly, provides valuable data to shrink that dartboard down tremendously. We’ve already learned that cost plus pricing and competitor based pricing can be useful, but they’re fairly weak overall, especially in the SaaS or software space. ![]() Data and these methodologies eliminate that space, guiding your dart to the ideal price point. The metaphor we’ve been using (some of you like it, some of you don’t) is a dartboard where you’re trying to hit a bullseye with the perfect price, but there’s all that extra space “distracting” your dart. Remember what we said last time, pricing is a process that utilizes data to eliminate as much doubt as possible for key stakeholders to make a profit maximizing decision. Value based pricing is the pinnacle of pricing if you can figure out how to get there (more on this below). We elaborated on this assertion in a previous pricing strategy post, but realize that a 1% improvement in price optimization results in an average boost of 11.1% in profits. We’re beginning every one of these posts with the same statement: “ Pricing is the most important aspect of your business.” No other lever has a higher impact on improving profits.
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