Value Based Pricing Demystified

Value can be defined as the quality (positive or negative) that renders something desirable or valuable

Value is a word which cannot be defined easily in an economic situation. It is intangible and often different according to whom you talk. Ask three completely different people about the “value” attached to a $30.00 shirt and you may well get three entirely different responses which could be:-

  • Great! only $30.00 and look what I have got
  • Yeah well what do you expect for $30.00? It may be good now but it will have to be replaced in six months time?
  • Yuck! who is this brand anyway?

Consider this…

img_3030-1.jpgA customer walks into a lighting store looking for a bedside lamp. The sales person will show the customer all the options available in the range of bedside lamps; what the customer really wants is something to read by at night. What the sales person has failed to do is to ask the customer the reason for purchasing a bedside lamp in the first place. There are any number of uses for a bedside lamp! One aspect of value is, however, universal; it is held in the eye of the beholder (the customer/client). It is the seller’s responsibility to identify what makes a prospective client see value (which we have seen is a very personal thing) and to apply selling techniques which will ensure that the prospective client sees the value in the service being offered using their own definitions and not those which the seller seeks to impose.

Once upon a time….

PaperworkA few years ago, I was training a group of budding new business owners and we had a discussion on this very subject. The topic was pricing your goods or services, we had a discussion about the concept of value and one participant’s business idea was essentially very simple; download a whole bunch of freely available material from the internet concerning Workplace Health & Safety, personalise this for her client and include all the necessary information for her client to become compliant. To package this up the material was all printed and personalised with company logos and included templates, policies and procedures, etc. and the whole bundle was placed in a good quality file prior to presentation to the client. The participant had decided to place a price of around $75.00 on the finished article which was based on input costs, time taken to create the finished product etc.

In so far as it went, this was fine until the word value was adjoined to the conversation. A number of concerns were raised but, in particular, the question arose as to whether this was in fact too cheap. Ultimately, the consensus was, that it was in fact too cheap how can somebody produce a product of this type which is professionally finished and, supposedly, government compliant for only $75.00? In the end, it was decided that a price of anywhere between $250 and $500 would have been more appropriate.

So how can you apply this in your business?

Firstly, and probably most importantly, please do not believe that by quoting the cheapest price, you will necessarily win the sale. During your discussions with customers or potential clients, find out what makes them tick and what they really want from you. You will only determine what your potential customer considers “value” through open questioning.

  • What are you going to use this for? (purpose)
  • What problem will this solve for you (benefit)
  • How will this help you? (benefits)

Often there will be deep seated reasons for a customer’s buying decision. Ultimately, they are looking for value in other words, for the money I am spending, will I receive what I am asking for and will the price for this be reasonable?

Further Thoughts on Value Based Pricing

So often new business start-ups under price their products/services. I think it comes down to a lack of self-confidence in the value of their own product and the belief that if they are cheap, it will be easier to make sales. While value is in the eye of the purchaser, price is in the mindset of the seller!

Value is intrinsically, in the eye of the beholder. What a successful business needs to do when embarking on a journey of value based pricing, is find out what the value is to the beholder, and ensure that the product/service offering that is being made, clearly aligns with the perception of value that is excepted. We all, as both consumers and service providers, need to recognise the separation and delineation between the price we pay/charge, and the value we obtain/deliver. Sell the benefits (value), and the rest should start to take care of itself!

For me, ‘value’ is what buyers are happy to pay. Identify and target their most acute pain points with an exclusive solution and they will pay a lot. Offer a generic solution and they will gravitate towards the lowest price. Beyond market average prices can only be achieved if your value proposition targets important unmet needs that buyers will pay to have fulilled. If the market perceives that, generally speaking, what you offer is a commodity service, why should they pay more?

So how do you value your products or services? Is it time for you to reconsider your pricing strategies?

Price is what you pay. Value is what you get.

~ Warren Buffet

Just another way to Love Your Numbers

Want to grow your business? Our Free Resources will Help