How to Implement Value-Based Pricing

TL;DR

• Adopt a value-based pricing approach by understanding it's not about costs but about the perceived value to the customer.
• Segment your customers to identify how different groups perceive the value of your products or services.
• Conduct market research and gather customer feedback to deeply understand your customer's needs and how they value your offerings.
• Develop a clear value proposition that sets you apart from competitors, then establish pricing tiers that reflect the value delivered to each customer segment.
• Value-based pricing can enhance business revenue and brand image by entering new markets or boosting profits.
• Communicate changes effectively and test your pricing strategy with a small segment before a full rollout.
• Consider value-based pricing if your product is unique, has a strong value proposition, or if you have a deep understanding of your customer's needs and pricing expectations.
• Togai offers an end-to-end solution for businesses to launch any pricing model swiftly, enhancing pricing and billing efficiency.

Understanding the Value-Based Pricing Approach

Value-based pricing is starkly different from cost-based and user-based pricing. Cost-based pricing is determined by adding the total cost of the labor and materials that go into making the product. The seller attaches a profit margin to this number and arrives at the final price. On the other hand, value-based pricing rides high on the product’s benefit and the customer’s perception of its value. It takes into consideration the customers' willingness to pay.

Here are some common examples to help you understand value-based pricing better.

• Luxury goods: They are often priced based on the value that they deliver to the customer, rather than the cost of production. This is because customers are willing to pay a premium for high-end products that are perceived as exclusive and high-quality.
• Premium food and beverage: Some restaurants and food and beverage brands' pricing is based on the perceived quality and exclusivity of the product. Some factors that influence pricing can include premium ingredients, unique flavor profiles, or the experience of dining at the restaurant.
• Consulting services: Here price is based on the value that the consulting services deliver to the client. Take lawyers, for example. Based on the level of expertise required, the complexity of the case, or the potential financial benefits to the client, the price will be determined.
• Software as a service (SaaS): Some SaaS companies like Salesforce and Hubspot use value-based pricing. Here the price is based on the value the software delivers to the customer. It can be influenced by the number of users, the level of support provided, or the amount of data storage.

Arriving at a value-based pricing strategy requires a bit of work. If you want your products to be sold based on value, what is the best way to do it? Let’s get into the details.

6 Key Steps to Practicing the Value-Based Pricing Approach

1. Segment your customers 

Not all customers are the same. Therefore, customers' perceptions of value vary according to their characteristics. Identify your customer segments based on factors such as demographics, psychographics, buying behaviors, and preferences.

Other factors to consider are their age, job profile likes and dislikes, habits, budget, job location, pitfalls, and challenges.

Generally, value-based pricing references one specific segment. For multiple segments, one must determine a suitable value-based price for each one.

2. Understand your customer

Do market research and gather customer feedback to understand customers' needs and preferences. Develop insights into the key value drivers for your customers, and how your product can meet those needs better than your competitors. Acquire an understanding of how your customers perceive your products since your customers' willingness to pay has the biggest influence over the final price. Market fluctuations and competition should also be studied and understood.

3. Determine your value proposition

Identify the unique selling points of your product. Take into consideration your competitors' pricing strategies, especially the competitor based pricing, and identify how they are positioning themselves in the market. How are you different from your competitors? This could be features, quality, speed, reliability, customization, or service. This will help you determine the optimal price point for your product or service based on the value it delivers to customers relative to competitors. Further, determine the benefits that your product or service provides to your customers. What problems does it solve for them, and what value does it provide? What are your customers willing to pay for your product or service?

4. Establish tiers and set prices based on the value

Value-based pricing adopts a customer-centric approach. Businesses must tailor their products to match customers' needs and interests. Develop pricing tiers (each offering a different set of features or benefits) based on the value proposition and the customer segments you are targeting.

5. Keep communication alive

Use all your communication channels to keep your customers updated about your plans for launching value-based pricing. This step is particularly important for new businesses. In existing businesses, you need to be careful not to upset customers by changing prices. Leverage your communication skills to implement the change in pricing and emphasize each selling point so that your customers know what they are paying for.  

6. Make gradual changes

It is advisable to first test the pricing strategy with a small sample of customers and gather feedback on the perceived value and price point. Refine the pricing strategy based on customer feedback, and continue to iterate until you find the optimal pricing strategy.

This cycle should be repeated on various client groups. In time, you will create a customer base acclimated to your products and their value-based pricing.

Also Read: The Art of Calculating Accurate Value-Based Pricing

When Is The Right Time to Use Value-Based Pricing?

The right time to implement a value-based pricing strategy for your business depends on several factors, including the maturity of your product, the size of your customer base, and the complexity of your pricing structure. Value-based pricing is an excellent strategy to enhance your business and revenue. This pricing model is suitable if your business ticks any of the following criteria:

• Your product or service has unique features or benefits that differentiate it from its competitors.
• You have a mature product with a well-defined value proposition.
• Your product has an emotional appeal to customers
• You have limited competition or your competition is unable to provide the same level of value.
• You have a good understanding of your customers' needs, pain points, and pricing expectations

Value-based Pricing: For Long-Term Success

To implement value-based pricing effectively, there are several factors to consider. Some things to think about are how the market affects the perceived value of your product or service, how much value your customers place on what you offer, and how your competitors affect your value-based pricing strategy. While this pricing approach may not be suitable for every business, it can be an effective way to enter a new market, boost your profits, and improve your brand image.

If you are looking to implement your pricing strategy, we are here to help. Togai is an end-to-end metering and pricing infrastructure that businesses can leverage to launch any pricing model in the shortest time possible. If you are curious and would like to take a look, sign up here. Or you can schedule a demo!