Many businesses sell their services by operating under the labor theory of value, where the value of a service is determined by the amount of labor used in its production. But there is another theory that is being used successfully. Value-based pricing!
What is Value-Based Pricing?
Value-based pricing is a subjective pricing strategy which sets prices primarily, but not exclusively, on the value to the customer rather than on the cost of the product or market prices. It has been called the pinnacle of pricing. But getting there takes some research.
Advantages of Using Value-Based Pricing
The more common pricing strategies, such as cost plus and competitor based pricing, ignore the customer. The price points are justified based on internal cost or adopting existing market prices. But customers don’t care how much it costs to make something or the business’s operating costs, they care about the value they are receiving at a certain price. Value-based pricing encourages client communication to find out exactly what the customer/client perceives to be valuable. More communication generally leads to a higher level of customer service.
Value-based pricing looks at what consumers consider when determining a value assessment. This allows marketing teams to formulate more effective sales strategies and use specific marketing tactics.
Value-based pricing seems to be more resistant to an economic downturn. If clients feel they are spending their money wisely, they will be more willing to pay for the services.
Disadvantages of Using Value-Based Pricing
Value-based pricing demands much research. The needs and wants of clients change, the competition changes. The research must be ongoing. Also businesses cannot ignore the cost of running the business. As you can see, reaching that pinnacle is not an easy task and will take some work.
Value-based pricing is not a set it and forget it price. It takes dedication but can reap enormous benefits in terms of better communication and customer service, which can lead to more profit. Having the correct pricing strategy can make or break a company. Are you using the right one for your business?