What You Should Know About Value-Based Pricing

For years, Ben & Jerry’s barely broke even. Each year, they’d try to increase profit by eliminating waste, cutting operational costs and increasing revenue. Yet, no matter how much revenue increased, or how much costs were cut, Ben & Jerry’s was never more than break even. That all changed when they upped their prices and adopted a value-based pricing model.
Simply put, value-based pricing involves setting a product or service’s price based on the perceived benefits and returns they provide to customers. This is in complete contrast to the cost-plus pricing approach where the price is built entirely around the product’s manufacturing costs.
Revising your pricing strategy centered around value provides you the leverage to command higher prices and differentiate you from competitors.
With value-based pricing, a company must be able to define the value their product brings to the market. In this sense, the value-based pricing approach is an above-the-market pricing strategy, one where a company is able to differentiate its product from its competition by appealing to what customers see as value-added. So, what are the criteria that make value pricing possible?

Well-Understood Value Proposition

Don’t make the common mistake of thinking that “me-too” products can’t adopt a value pricing model. The ability to charge more for a product or service correlates to a well-defined and well-understood value proposition, one that your customers truly appreciate and understand. In this case, perception is 100% reality.
A perfect example was illustrated by Marcus Lemonis on a recent episode of The Profit where he raised the price of a marshmallow treat by $0.50 cents simply by putting a $0.02 sticker on it. Rather than handle the marshmallow with their fingers, customers saw an aesthetically-pleasing product and were willing to pay more for it.

Distinguishable Characteristics

That aforementioned example worked because it differentiated the product versus its competition. It wasn’t much, but it didn’t need to be. It was a simple solution, one where customers came to see the marshmallow as a gourmet item because it looked like it took longer to prepare. You can never underestimate the impact of a visually stunning presentation. After all, if it looks like it costs more, then it must be worth the price, right?
Value pricing
Your customers hold all the pieces to using the value-pricing model.

Voice of Customer (VOC) Data Gathering

Ultimately, it all comes down to gathering VOC data. Assuming your product should be priced higher because of your own perceived value won’t fly if your market and customers don’t see things the same way you do. Speak to your customers. Ask them what they think of your offering.
Do they value your product more than your competition’s?
Are they willing to pay more for that all-important added feature?
Have customers come to see your product as having higher quality than others?
Don’t be overwhelmed with gathering this market intelligence. Most of the information is made readily available to you through social media and reviewing your online reputation. Both sources will help you define how customers see your company, its products and its services. Use that to your advantage and propagate messages that reinforces your value.
Define your product’s unique features and then see if its distinguishable characteristics are enough to convince customers that a higher price is warranted. Don’t make this process too complicated. Outline what you bring to the table and use that messaging throughout your marketing solutions to justify your price.
If you need to revisit your pricing structure with respect to your market position, let’s start a conversation and see how we can revise your pricing approach.

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