The Pros and Cons of Value-Based Pricing

Value-based pricing is one of numerous pricing strategies that can be used to set the price of a product or service, with each having advantages and disadvantages that make them more suitable for certain markets and industries. 

Here we will focus on the competitive pricing advantages and disadvantages of using value-based pricing to sell a product or service.

What is value-based pricing?

A value-based pricing strategy involves setting the price of a product or service according to the customer’s perceived value of said product or service. This means the price is not determined by however much the product or service costs to produce or provide, but by how much the customer is willing to pay for it.

This pricing method allows you to set a much higher price and increase the profitability of each sale, although the product or service must have a very high perceived value in the eyes of the customer for this strategy to work. 

Competitor-based pricing

The competitive pricing advantages of this strategy are that you can market your product according to the prices set by your competitors for similar products. This means you can present your product either as the cheaper alternative or as a more expensive premium version. You may also keep your prices exactly the same as your competitors and rely on other elements to attract customers, such as superior promotion or packaging.

Cost-plus pricing

Cost-plus pricing means calculating the full cost of acquiring an item you buy to sell, then selling it at a higher percentage for profit. 

Pros of value-based pricing

There are three main advantages to using a value-based pricing system. These competitive pricing advantages include:

• Increased brand value

• Higher profit margin

• Customer loyalty

Increased brand value

Setting a high price for a product immediately increases the value of the brand, which in turn can increase the customer perceived value of the product. High prices generally make consumers perceive products to be of a superior quality, so the brand value of those products is also increased.

Higher profit margin

You can massively increase your profits with value-based pricing, assuming the customers are actually willing to pay up. The higher the perceived value of your product, the more customers are willing to pay for it, so setting the price as high as possible while ensuring there are still customers willing to pay for it will only increase your profit margin.

Customer loyalty

When people invest a lot into something, they become emotionally attached to it. This is the case with a purchase, too; the more a customer pays for something, the more emotionally invested in that item they become. This creates customer loyalty that is evident in high-end items where there are competing brands. 

Cons of value-based pricing

The main disadvantages of value-based pricing mean that it is a pricing strategy that only works in certain conditions. These disadvantages include:

• Niche markets

• Increased competition

• Higher production costs

Niche markets

High-end products can be very profitable if there are customers willing to buy them. However, the target demographic for such items is much smaller than other markets. A company selling £200 suits is going to shift a lot more units than the bespoke tailor selling £3,000 suits.

Increased competition

The nature of a niche market means an increase in competition because of the smaller pool of customers available. With so few customers, losing just one to a rival can be a significant setback.

Higher production costs

If you are going to sell an item at the highest price possible, then that item needs to be of the very highest quality. This obviously increases your production costs as no corners can be cut with high-end items.

We Can Help

If you’re interested in discovering more about the pros and cons of value-based pricing, or any other aspect of your business and its finances, then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.