Marketing: Value-Based Pricing

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August 27, 2012 by entrepreneurapproach

In any business, the most overlooked aspect would have to be pricing strategies. Who knew there are strategies on pricing? There are many different ways to vary pricing to stimulate or alter consumers perceptions in your favor, which all come under the heading ‘Pricing Strategies’.

Pricing strategies are a great way to increase sales, attract more customers and gain a competitive advantage without having to spend more money on research and development, new branding etc. They can be changed very quickly which allows a business to stay competitive at an efficient pace and be able to respond swiftly to changes in the market.

There are a number of pricing strategies that can be use, but my favourite and the one I believe is the most effective in increasing revenue and appealing to consumers is Value Based Pricing.

In any pricing structure there are a lot of different variable and fixed costs, these costs can include:

  • Manufacturing
  • Packaging
  • Distribution
  • Other Overheads
  • Selling Expenses

 

As well as other fixed costs such as labour, power and rent are all included into the cost of the final product. Sounds like a lot to put into a product such as a chocolate bar? This is when a business owner needs to get their thinking cap on about how they are going to make any money out of their business.

First off, lets understand what value in marketing is:

Value can be described as the conceptualization of something’s worth to an individual. It the is the amount willing to be given away in exchange for something that is seen to be of equal worth.

If you go to a store, and see something you want, but don’t think the item is worth paying the price that it has labeled on it, this is seen as negative value, as you value the item lower than the store price. If you see something you want and see that the price on it is worth paying then this is seen as positive value.

Hopefully you understand the basic concept of value and I can know explain the pricing strategy of value based pricing.

Value based pricing is the reverse to what most businesses do to price their products. Value based pricing refers to the practice of basing a products costs on the perceived value that your consumer has of the product.

How can you calculate the perceived value of your product?

Easy!

Market research is your answer, and although it sounds lengthy and complicated, its actually very simple!

All you need to do is show your product to a group of people, and ask them what they would be happy to pay for that item, or what they ‘value’ the item to be.

This will give you an understanding of what people are ‘willing to pay’ for your product.

Once you know what people are willing to pay for your product, you know what you should be selling your product for. As I mentioned before, it’s a reverse tactic to what the majority of businesses do. Most people will work out their costs then add on a profit margin that they are happy with. Although this may give you the return on each product you want, in the long run it won’t give you the total return you want.

If you were to base your pricings according to what your costs are, you would be, in fact, not utilizing your potential target market to its fullest. The best example for this is if 60% of your market values your product at $3.00, but 40% values it at $2.00, the drop in price from $3 to $2 would actually increase total profit. This is because the people who valued the product at $3 would still buy it at $2, and the people who value your product at $2, wouldn’t buy at $3 but now will buy at $2.

You open up a lot more opportunities than you would with traditional pricing methods. I hope that this has sparked some thought about value based pricing. It is something I will be using as I set my business up. I plan to use the simple method I explained earlier. I plan to get some product variations made, then show them to people and survey them to see what their value perceptions are. This way I can maximize profits and increase my sales.

  • Tip 1: Always look for ways to increase value, the higher something is valued, the higher the price you can charge.
  • Tip 2: For pricing, research what people are willing to pay not what you want them to pay.
  • Tip 3: Keep surveying people even after your product has been launched, it will allow you to adapt your prices to economic and demographic changes.
  • Tip 4: Keep reading these posts for more information on pricing strategies!
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