Pricing is one of the most important factors in a business’s success, directly impacting cash flow. Price your services too low and you diminish cash flow with a tighter profit margin. Price them too high and you run the risk of pricing out would-be customers who can’t – or aren’t willing to – pay. Could a value-based pricing strategy work for you? Here’s what you need to know about value pricing and positive cash flow.
The importance of cash flow
It’s nearly impossible to overstate the importance of cash flow in a business. Persistent negative cash flows will surely lead to business failure, while a positive cash flow gives way to reinvestment and growth. Performing a cash flow forecast helps you see where your money is coming and going, shining a light on areas that could be streamlined for greater profit.
Are you bringing in significant profits, but it seems like there’s little left over at the end of the fiscal year? The answer could lie in your cash flow statement. Look at operating cash flow to pinpoint costly expenses. Your pricing strategies have a direct impact on net cash flow, whether it’s positive or negative. If you’re pricing your products at a low point that doesn’t cover the cost of production, this won’t be sustainable for the long term.
What is a value-based pricing strategy?
There are several pricing strategies to try, one of which is based on value. A value-based pricing strategy bases price on the perception of value. In other words, you’ll price your services or products at the level a customer is willing to pay. This might not necessarily align with what the product is worth, as perceived value can be intangible.
For value pricing to work, it’s important that businesses have a firm understanding of their customer base as well as an in-demand brand and finely tuned marketing strategy. For example, fashion brands often employ value pricing. Customers pay more for the latest collection from a must-have label. Value pricing can have a negative impact on net cash flow if customers perceive the product to hold lower value. The company will be constricted in what they’re able to charge.
A value-based pricing strategy doesn’t only include the item or service itself when dictating value. It also includes the value of the full buying experience, from quality to convenience. In this way, it’s possible to increase the perceived value of a product without increasing its production costs. This offers a way to improve operating cash flow.
How to use value pricing?
If you want to improve positive cash flow, you need to decrease costs, increase revenue, or a combination of both. Here are a couple of strategies that use value pricing.
Increase the amount your customers are willing to pay.
This first tactic increases company revenue, thus giving cash flow a boost. The big question is how can you increase customer willingness to pay more for your products?
Establish your brand as a luxury or status symbol.
Focus on environmental sustainability and fair-trade production processes.
Add fresh features to set your product apart from the competition.
Rebrand with a more distinctive aesthetic.
Anything that makes your brand stand out can increase perception of value, which means customers might be willing to pay more.
Decrease costs by paying less to suppliers.
Value pricing works both ways, not just with your own customers but also with your suppliers. If you are less willing to pay a higher price for items involved in operational expenses, this also presents an opportunity to improve cash flow with value pricing. Suppliers will need to consider whether they’re willing to accept a lower price based on your own perceived value. To make it worth their while, you might try things including:
Purchase supplies in bulk at a discounted rate.
Commit to longer term contracts for reduced costs.
Provide alternative forms of non-monetary compensation.
This also adheres to your own employees. You might be able to cut costs by trading perks for an increase in wages. Perks like extra vacation time increase the value of a cut-rate salary.
The bottom line
While value pricing doesn’t work for every business model, it’s worth considering if you’re able to find ways to make your company stand out from the competition. When customers are willing to pay more for your products and services, this in turn increases net cash flow and enhances growth opportunities. Pricing strategies should constantly be evolving to meet your customer and business needs.
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