TL;DR
- Value-based pricing is your strategy to set prices based on customer-perceived value, aiming for flexibility and higher profitability.
- Benefits include a deep understanding of your target market, the potential for increased revenue, motivation to improve product quality, and fostering customer loyalty.
- Expect to face volatility in customer perceptions, limitations in customer focus, the need for frequent strategy re-evaluations, internal pushback, the necessity for in-depth market research, and challenges in effectively communicating value.
- Solutions involve educating your team and stakeholders about value-based pricing advantages, conducting thorough market research to understand customer willingness to pay, and improving communication strategies to better articulate product value.
- Ultimately, mastering value-based pricing requires a focus on the customer's perspective of value, continuous adaptation, and clear communication of the benefits your product offers.
- Togai's advanced technology and deep customer insights can effectively implement a value-based pricing strategy, enhancing business success.
In an increasingly competitive marketplace, companies are looking for new and innovative ways to remain profitable. One approach gaining traction is value-based pricing: setting the price of a product or service based on the value it brings to the customer. A value-based pricing approach sets prices based on the value customers perceive they will receive rather than what competitors are charging or the cost to produce the product.
Being beneficial to both customers and companies alike, accurately assessing the true value of a product or service can be quite difficult. In this article, we'll discuss some of the common challenges businesses face when trying to set value-based prices and what they can do to overcome these obstacles.
But before understanding the challenges, let’s first understand how value-based pricing can benefit your business.
4 Advantages of Using Value-Based Pricing for Your Products
Value-based pricing is centered on the value a product or service offers to the customer. This method offers greater flexibility in achieving pricing objectives compared to other pricing strategies. Adopting a value-based system helps you
1. Understand Your Audience
To arrive at an acceptable price point for your product, the first step you take would be to research your audience. When you understand your target market, you know which product features to develop to make your product more valuable. Additionally, you can use the insights you gain from research and analysis to market, sell, and support your customers.
2. Increase Revenue
The higher your product value, the higher your product price, which is a key aspect of the pricing model used. That’s the magic of value-based pricing. It allows you to decide lofty prices as long as your customers are willing to pay. Moreover, profits can soar if your product's perceived value exceeds your current price.
3. Develop Better Products
Value-based pricing gives your company a competitive advantage. Your profits are higher when your customers value the product more. Having this incentive on your side motivates you to create a quality product that offers customers a better value than your competitors. Ultimately, all parties win—you make more money, and your customers get a better product.
Similarly, customer service plays an integral part in improving the value of your product. The value-based pricing model encourages your company to provide top-of-the-line customer service, which every customer wants.
4. Inspire Loyalty
There is only one pricing method that focuses on the customer experience and their needs instead of internal or market factors, and that is value-based pricing. The more your customers know you care about their needs and budgets, the more loyal and trusted they become.
Now, let's turn our attention to the other side of the coin because value-based pricing has its own set of challenges.
6 Challenges to Expect With Value-Based Pricing
1. Extremely Unpredictable
The first bump on the road as you practice value-based pricing is its volatility because people’s perceptions of your product may change without warning. When that happens, you will be forced to change your price point accordingly. Such drastic and sudden changes may jeopardize your business plans and your budget.
2. Limited Customer Focus
Value-based pricing needs customers who have the financial capacity to pay your price and the mindset to accept it. The latter is something you will find in only some of your customers. Despite their appreciation of the product's value, some may not be able to buy it. Therefore, finding customers who tick both boxes is a big challenge.
Focusing on only one segment of your target audience at a time is an effective method for calculating your price point and implementing value-based pricing. However, that itself can be a drawback as you cannot simultaneously target multiple segments. Even if you manage to do so, it will take a lot of work to determine a favorable price point for each segment, which may not be conducive to your business.
For instance, a luxury car manufacturer may primarily focus on high-end customers, setting a high price based on their perceived value of the brand. However, this approach may limit the manufacturer's ability to target more cost-conscious customers and may require significant effort to determine a favorable price point for each segment. As a result, the manufacturer may miss out on a larger market and potentially sacrifice profit margins. In order to overcome this challenge, the brand may need to diversify its product offerings, target different segments of the market, or find alternative ways to communicate the value of its products to customers.
3. Burden of Re-evaluation
Value-based pricing isn’t a ‘fix it and forget it” type of solution. Bringing it to fruition necessitates a complete overhaul of your business development strategies. You may have to re-evaluate everything, including:
- The entire scope of your product or service.
- If your offerings will solve your underlying business problems.
- The value of resolving these issues.
- Whether your strategy is better than your competitor’s.
- Your ability to demonstrate that your strategy is better.
- Your customer’s trust in your product.
There is a possibility that each of these questions will significantly impact the price you charge for your services.
An example of this can be seen in any software development company. In order to implement value-based pricing, the company may need to re-evaluate its entire business development strategy. For instance, the company may need to revise its pricing strategy if it finds that its product does not effectively solve the business problems it was intended to address, or if competitors are offering better solutions, through their competition-based pricing methods.
4. Challenging Internal Changes
Value pricing can often be hampered by administrative processes inside a company. For example, it may be challenging to change your billing system if it generates bills automatically based on recorded time. Furthermore, value-based billing could upend the traditional system of paying employees and equity partners according to billable hours. Whether significant or small, you may face stiff opposition from within your company while bringing these changes into practice.
5. Extensive Research
Knowing your target audience is as much of a challenge as it is a responsibility. You may require an entire team and plenty of time to gather crucial information about your potential clients:
- Buying capacity.
- Thought processes.
- Lifestyle.
- Buying habits.
- Perception of value.
The team must conduct surveys and customer interviews, gather data, and consolidate the results to determine an addressable price point. As you can imagine, all this requires a great deal of effort.
6. Difficult to Communicate
If value-based pricing is your choice, you better be prepared to train your staff about its intricacies and workings. If not, you could face many unexpected problems, which may cause hesitancy among your clients. If your messaging is not clear or if your customers don't understand the benefits of your product or service, it could become a real challenge.
For instance, a company selling software uses value-based pricing, but its sales team is not fully trained on how to communicate the value the software provides to the customer. During sales pitches, they struggle to articulate why the software is worth its premium price compared to competitors, causing potential customers to hesitate and choose a cheaper alternative.
Fortunately, as big as these challenges seem, there are also easy ways to overcome these hurdles.
Also Read: How to Implement Value-Based Pricing
3 Ways to Resolve Challenges With Value-Based Pricing
1. Administrative Challenges
You could face stiff opposition from stakeholders or partners. To alleviate this challenge, first, educate everyone involved about the benefits of a value-based strategy. Since benefits typically exceed expenses by a large margin, you can scale up or down your early moves toward value pricing as you gain experience. Basically, to gain the acceptance of the board and your employees, you would need:
- Good training
- Good experience
- Methodical implementation procedure
2. Customer challenges
Gather data and insights about your customers, their preferences, and their willingness to pay. This will help you to set the right price for your product or service.
While value-based pricing can focus on a specific segment of customers, it does not necessarily limit the customer base. A business can still attract customers outside of its target segment by offering additional products or services at different price points, or by using other pricing strategies such as discount pricing for those segments that may not place the same value on the core product or service. Additionally, as the business grows and expands, it can consider adopting a different pricing strategy to appeal to a broader customer base while still maintaining its value-based pricing strategy for its core customers. Ultimately, it's important to regularly evaluate the effectiveness of the pricing strategy and make adjustments as needed to ensure the business is meeting the needs of its customers and achieving its goals.
3. Acceptance challenges
To overcome the challenge of customers not accepting value-based pricing, you should:
- Compare your closing percentage to your pre-value-pricing baseline.
- Observe both value-priced and non-value-priced projects' profit margins.
You will likely discover that value-pricing produces greater results. If that happens, you should adjust your prices to align with your customers' current sentiment.
Bear in mind that your pricing is aligned with the value that the customer is receiving and that the customer is able to understand how the pricing is determined based on the value that you provide. Clearly articulate the unique benefits and value that your product provides, and how it meets the specific needs of the customer segment.
Wrapping Up
When it comes to value-based pricing, it all boils down to one thing: Your customer’s perspective value of your product. Numbers and formulae don’t play much of a role in this strategy. It is only when you understand this that you will be able to succeed with value-based pricing.
With its advanced technology and deep customer insights, Togai can help you accurately and effectively implement a value-based pricing strategy that will drive success for your business. Don't miss out on the opportunity to take your pricing strategy to the next level with Togai's pricing and metering software!
If you are curious and would like to take a look, sign up here. Or you can schedule a demo!
