There are many different pricing models that you may be considering for your business, and while value-based pricing is quickly becoming an attractive option, it’s still a frequently misunderstood concept that even pricing experts get wrong on occasion. If you’re a small business owner, it could be a good idea to get comfortable with value-based pricing, a model that has numerous advantages over hourly billing. First off, take a look at our value-based pricing definition.
Value-based pricing definition
Value-based pricing – sometimes referred to simply as value pricing – is a strategy that involves setting prices based primarily on the perceived value of your product/service. It’s a customer-focused pricing model because, rather than looking inward towards your own business model or laterally at your competitors, it allows you to base your prices entirely around how much the customer believes that they’re worth. This makes a value-based pricing system particularly relevant for companies offering unique or high-value products/features.
Why should I apply a value-based pricing model to my business?
There are lots of reasons why the value-based pricing system could be the right fit for your business. Firstly, if your research indicates that your customer base is willing to pay more for your service, your business can achieve a higher price-point from the get-go. Then, as you add more features and streamline your portfolio, you can adjust your prices to reflect the evolving value of your product/service. This is a distinct advantage upon competitor-based pricing, which only really allows you to react to prices set by other businesses in your field. For example, if they’re lowballing their prices, you could end up missing out on revenue.
It’s also important to remember that there are benefits associated with the value-based pricing system that go beyond your business’s bottom line. Paying attention to how your customers perceive your products should give you the edge when it comes to generating new ideas about what your product/service could bring to the market. Furthermore, the legwork of value-based pricing is largely based around customer research, surveys, interviews, and so forth. Doing this type of deep-dive research on your business model should help you to deepen your relationship with your customers, become more attentive to their needs, and boost retention.
How to apply a value-based pricing system
If you’re interested in the value-based pricing model, you’ll probably want to know how to start implementing it within your business. There are a couple of key steps that you should explore:
Bundling service packages – One of the first things you should do when implementing a value-based pricing model is break your business’s service offerings down into different bundles. That way, you can ensure that there’s a price-point to suit all of your clients, regardless of how much they’re willing to spend. Offering greater value with the higher-priced packages gives you the opportunity to upsell to clients on a lower tier.
Determine your price-point – Most importantly, you’ll need to work out how much to charge for each pricing bundle. Identify and analyse buyer personas, talk to customers, and consult with business advisors to get started. Remember: optimising pricing strategy is a long-term process that you may need to tweak numerous times before you finally get it right.
Communicate with your clients – When it comes to implementing a value-based pricing system, communication is paramount. Your clients need to understand what you’re doing and why you’re doing it. In addition to the practical side of value-based pricing communication, it’s important to explain clearly and specifically what sort of value you’re providing. Otherwise, the client may be unwilling to pay.
Implement changes gradually – It’s not a good idea to make the move to value-based pricing overnight. Instead, you should start with a couple of smaller clients, before slowly converting the rest of your customer base. It may be a good idea to start with a brand-new client, rather than a client that’s already been with you for a number of years.
Continue delivering value – After you’ve successfully made the shift to a value-based pricing model, it’s important to carry on offering value to your clients. By providing greater value through innovation in the future, you can move more clients into your higher-priced bundles and increase your revenue.
Disadvantages of value-based pricing
While value-based pricing is a very effective pricing model, it isn’t flawless, and there are a couple of drawbacks that it could be helpful to understand. Firstly, the value-based pricing model requires a significant expenditure of time and resources, and you’ll need to devote lots of man hours to calculating customer valuations and quantifying buyer personas. Furthermore, it’s important to understand that this isn’t a one-time cost, but something you’ll need to invest in continually as you move forward.
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