Value Based Pricing
Pricing can be a complex task to get right. The rewards of correct pricing show up in both customer retention and your balance sheet. One relatively unknown form of pricing is Value Based Pricing. You guessed it! Like the name says it is linked to perceived value by the customer of the goods or services you are offering.
What is Value Based Pricing?
It is a method of setting price based on what value the customer gets or perceives they derive from your product or service. At one end of the value based pricing scale the value received by the customer is taken into consideration when setting a price. For example a financial planner might look at the financial gains that customer will generally receive over the next 12 months from the plan and incorporate that into the initial plan fee. At the other end of the value based pricing scale, each individual customer may be charged a different fee based on the specific value they believe they are receiving from a product or service.
When is it Used?
Value Based Pricing is used most often in services where value gained can be measured financially. Services often have a variation in price structure which enables value based pricing to be possible such as accountants, financial planners, insurance brokers, consultants etc. An accountant may save you $5,000 in tax and that saving could be valued at $1,000. The amount of work that it took for the accountant to achieve that saving might have been $500. Under value based pricing they charge $1,000.
What Makes it Work?
Some key components required for successful implementation of value based pricing are:
- must have access to and understand your customers.
- your customers must place high value on your products or service.
- value of the product or service must be communicated often.
- your product or service must consistently deliver value.
Before looking to change your pricing structure to value based pricing, conducting research into your customers’ perceptions is a good first step. AP Marketing Works can help you design your research, collect information and interpret the results. Contact Ailsa if you need assistance with this form of customer research.
Ailsa
Great to hear of another devotee of Value-Based Pricing.
I would just query a couple of your points though.
2. Customers must place high value on your products or service – I disagree! I believe they should place a value on having their problems fixed or removed. Your products or service can fix or remove their problem, therefore you can charge a small fraction of the value as your price. The customer gets a huge return on investment and, if their self-valuation is high, you get a highly profitable deal. Your skill is therefore to help them see the full value for themselves.
3. Value of your product or service must be communicated often – This goes out of the window! What needs doing often is ensuring the customer is aware of the full value of having their problem fixed or removed.
Are you succeeding in converting many Australians to this way of pricing?
David thanks for your comments. I agree!
Being able to find solutions to customers problems is extremely important and communicating how a product or service can do this also communicates the value of this product or service. I believe that customers value products or services because of what those products or services do for them (which may be slightly different for each individual). The more important the benefit to the customer the greater the value they will place on that product or service.
I’m not really on a mission to convert Australians to this way of pricing rather let them know there is another way of pricing. It seems that businesses like the concept and will use it to influence their pricing but still tend to have the same price for everyone regardless of the variation of value from one customer to the next! I certainly see this pricing structure more in industrial marketing.