TL;DR
- Mastering value-based pricing calculation means putting your customer's perception of your product's value at the forefront of your pricing strategy.
- Focus on understanding your target market, keeping an eye on the competition, and clearly defining what makes your product stand out.
- Use customer feedback and market analysis to determine the right price point, ensuring it reflects the true value your product offers to your customers.
- Segment your target audience and tailor pricing strategies to meet diverse customer needs and expectations.
- Consider the competitive landscape to ensure your pricing strategy is competitive yet emphasizes the unique benefits of your product.
- Value-based pricing goes beyond simple cost-plus methods by focusing on the value your product provides to customers, making it a more strategic approach to pricing.
- Utilize Togai Insights' resources to effectively implement a value-based pricing strategy, leveraging data and insights to align your pricing with customer expectations.
Value-Based Pricing: Prioritizing Your Product Value
If manufacturing, creating, or devising a product is a Herculean task, so is the process of placing a price on its head. The effort is tripled when you implement value-based pricing instead of cost-based pricing.
Value-based pricing is a powerful way for many businesses to set their prices. Instead of just adding a profit to the cost of making the product, this pricing strategy allows you to charge based on how valuable the product is to your customers. To make this method work, businesses need to first take time to understand their customers, what they need, their perception of your product, and their willingness to pay. It is not about having a lot of features or having a high-quality product. Instead, it's about creating value and capturing the value provided to the customers.
Value-based pricing calculation can be challenging because this strategy looks beyond mere production costs. In this blog, we are breaking down what it takes to implement value-based pricing. Let’s get to the basics.
3 Criteria to Consider for Value-Based Pricing
You cannot implement value-based pricing overnight because it requires strategic planning and preparation. There are four basic factors that you need to consider:
1. Target audience
Take time to understand your target audience. Divide your customers into groups based on common characteristics, such as demographics, behavior, or willingness to pay. It's important to understand the pricing expectations of your target customers since different customer segments may have different pricing expectations. Use your insights to tailor your pricing strategy to meet the needs of each segment.
2. Market conditions
Market conditions can influence the perceived value of your product, your customer's willingness to pay, and the overall demand for your product. The level of competition in the market is one such condition. If there are many similar products available, customers may not be willing to pay a higher price for your product.
Also, during times of economic uncertainty, customers may be less willing to pay higher prices. Industry trends might affect the value of your product.
Moreover, industry trends can affect the value of your product or service. For example, the move toward mobile experiences. Customers may be willing to pay a premium for applications with better online experience for mobile devices.
3. Your value proposition
Understanding the value that your business offers your customers is crucial for determining the price points that are aligned with the value you deliver. When defining your customer value proposition, consider what unique benefits you offer that your competitors do not, and how your product differs from your competitors' products. Also, what pain points does your product solve for customers?
These aspects are the fundamental pillars on which your value-based pricing strategy rests. Once you’ve got them right, it's time to move on to the following steps to ascertain a value proposition.
3 Ways to Define Your Product or Service Value
1. Assess your customers
It's essential to know the price point your customers will be willing to pay since that determines your price point. Rather than relying on assumptions, reach out to your existing customers who are now well aware of your product value. Ask them how they perceive the product's value and how much they are willing to pay.
It's important to keep in mind that this pricing approach is mainly based on what your customers perceive as value.
2. Identify your market potential
Customer perception and inputs are absolutely essential to deciding on a price point. But when you have your existing customers give you their perception, the results could be biased. To make your pricing decisions more accurate, do a detailed market analysis and a survey your total addressable market (TAM). This will give you enough insights into how your potential customers value your product
3. Study your competitors
You can gauge how much your target market values the product by setting it at a price similar to the competition. Also, if you are new to the market, proceed cautiously rather than launching a high-priced product immediately. If not, it will affect your sales, forcing you to change your pricing strategy to align with that of your competitors. This situation is more likely to happen if your competitors have well-established brand loyalty for their products.
With value-based pricing, there is obviously much to be done, mainly because there is no hard and fast formula to follow to arrive at the final selling price.
In order to illustrate how value-based pricing works, let's take the example of a software company, Brand A, which is about to launch a new management software. Their goal is to determine the price of the software since their closest competitor, Brand B, has recently launched a similar product at $50 per month per user.
Let’s note that although both software is packed with similar features, Brand A has a couple more features than Brand B.
Now let’s apply value-based pricing based on these steps.
Implementing Value-Based Pricing in 5 Steps
Step 1: Focus on a single client segment
Unlike cost-based pricing, value-based pricing targets only one customer segment at a time. When it comes to B2B products you could target only a single customer. Therefore, for value-based pricing to work, you should have already identified your target customer segment. In case you have multiple segments, you need to determine an appropriate value-based price for each.
Let’s say Brand A’s advanced features deliver more benefits than Brand B’s. It provides resource managers with real-time analytics to better understand their teams. Therefore, the target segment for Brand A is businesses relying on such insights to boost team productivity and efficiency. This client segment will know Brand A's value and be willing to pay for it.
Also Read: The Pros and Cons of Value-Based Pricing
Step 2: Compare existing alternatives
Value-based pricing works well when your target customer segment is already looking up to a specific competitor’s product. The value-based pricer always wants to know what this particular customer segment would buy if their product weren't available. Therefore, to calculate the value-based price, it is necessary to compare the "next best alternative" for the target segment.
Step 3: Identify your competitive advantage
Next, identify what sets you apart from the direct competitors. Analyze:
- Features that make your product better than the second-best option in the market.
- The value of these features for your customers.
In short, you need to find out how you're better than your competitors from your customer’s perspective.
Step 4: Determine how the second-best option is superior to yours.
When you take up value-based pricing, it's best not to assume that your products are the best in the market. There will always be an existing competitor with a better product than yours. Your responsibility is to:
- List all the features that make this product the best in the market.
- Find out how much the customers value these features.
Do remember that only a fair assessment will give you a clear picture of where your product stands in the market.
Circling back to our example, Brand B will have to consider the advanced features of Brand A’s software and set its price accordingly.
Step 5: Price your differentiation features
Putting a price on features that differentiate your product from others is the most challenging phase in calculating a value-based price. Here is how you calculate a value-based price once you have completed all the steps above:
Value-Based Price = Step 2 + Step 3 – Step 4
In other words,
- Take the price of the second-best option
- Add the value of your offering’s advantages over the second-best option
- Deduct the value that the second-best option has more to offer than yours.
Your value is a combination of
- Your brand advantage.
- Distinguishing features of your product.
- End value your product offers your customer.
Your end price point will finally be the sum of your brand value added to the value of your product. By doing this, you will be able to get an accurate estimate of the price of your product.
Achieve Value-Based Pricing With Togai
Done well, value-based pricing can:
- Elevate your business to a whole new level.
- Help you remain agile in the market.
- Provide valuable customer insights.
- Strengthen your brand value.
In conclusion, Togai understands the importance of aligning a product's value with the consumer's perception. Cost-based pricing may be straightforward, but it overlooks the consumer. Togai’s pricing and metering software allows you to assess product usage, and use data to implement a value-based pricing strategy. If you are curious and would like to take a look, sign up here. Or you can Schedule a demo!
