S7 E20 – Value Pricing – is it really that difficult? How Value Pricing will maximize your profits with Jeremy Gray

1. Value-Based Pricing Strategy A value-based pricing strategy is when companies price their products or services based the price that the customer is willing to pay for a product. How you establish what a customer is willing to pay can be challenging and is a reason why many companies shy away from value-based pricing and revert to cost plus pricing. If how much money you can save your customer can be estimated in dollar terms this can used as a basis for value-based pricing. It is harder to value time saved, sometimes it is clear, sometimes it is not. When your product or service saves you customer money. Say you estimate that your product will save your customer $100. An economist may argue that you could sell your product for $99 as this would still benefit your customer to the tune of $1. Of course, this is nonsense, although mathematically it might make sense no customer is going to spend $99 to save a dollar. Maybe you could charge $50 for your product and split the savings with your customer. Maybe, if there were no switching costs and your customers was 100% convinced that the projected savings could be achieved. But there are always switching costs and always some doubt that the product and service will deliver the savings projected. Research has shown that customers are more likely to switch if they can see a four or five fold advantage in switching. So, for the $100 savings you can deliver you will probably be able to charge $20 to $25. Seems unfair doesn’t it the customer gets $75 or $80 of savings, and you get a miserable 20 or 25 bucks. Never mind once the value of your product is proven you will be able to raise your price but it’s unlikely you will ever get to a 50/50 split. The same applies where time savings are quantifiable. If the cost of a construction crew is $500 per hour and you can save them two hours the benefit of your product or service is $1,000. Probably you could sell your product for around $200 to $250. For most products and services, it is impossible to quantify the value in the eyes or mind of your customer. So how do we go about determining how much the customer is willing to pay? You have to focus on a specific segment. If you are a B2B company you may have to focus down to a single customer, as the price customer A is willing to pay may be different to the price customer B is willing to pay. Compare your product offering with next best alternative. What would my customer buy if my product was not available? Singapore Airlines might compare their business class service to Ho Chi Minh City with Vietnam Airlines direct flight from Singapore to Ho Chi Minh, or Malaysia Air service via Kuala Lumpur. You should then need to figure out what is features in your product offering are unique, what differentiates your offering from your competitors. Maybe Singapore airlines are flying planes with a more recently upgraded business class seating that is superior the Vietnam airlines, maybe their food and drink offerings are better quality and a more extensive range of choices. Finally place a dollar value on the differentiation. How much is the superior Singapore business class interior and better food, and drink is worth versus Vietnam Airlines offering. More accurately we are trying to estimate how much more is a passenger willing to pay for the more comfortable surroundings and the higher quality of catering. Some of the misconceptions about value-based pricing. Value based pricing will lead to success every time. Sadly, this is not always true, remember in every strategy or tactic you follow your competitors gets a vote. If your competitor markets their product or service at a price well below what the customer is willing to pay there is no way you will be able to achieve the true value of your offering. If you are lucky, you have smart competitors that understand the value.