3 Reasons why value based pricing is the best strategy
April 14, 2021 0BusinessEntrepreneurStartup
Apr 10, 2021 | Updated Apr 14, 2021
By @JoshuaNgala
Your first step to undertake a business venture is to have a purpose. The higher-order benefit your venture brings to the world in improving people’s lives should be creating value to consumers.
For every entrepreneur and startup, consumer benefit is linked to profit margin. But how then do you decide the price of your product?
Pricing is a process with the ultimate goal of defining a strategy that will maximize your revenue. Therefore, important to make decisions that help in arriving at the right pricing strategy for your business.
But the fact remains many people automatically think cost-based pricing which sometimes known as cost-plus when they think of “pricing strategy.”
In this stratagem, the company calculates costs, and then adds a healthy 20% margin on top. It works well for a few months until some unexpected costs crop up. Then the margin is cut to 5% and then 0% with huge losses.
The biggest mistake many businesses make is to believe that price alone drives sales. Sales are driven by your brand ideal. Its directly linked to Value-based pricing (VBP) by setting prices according to the perceived value of a product.
Below are three key reasons to base your pricing on customer value:
1. Opportunity for a business to know its customers
VBP gives businesses a very good perspective of their customer base by focusing on their willingness to pay for a product.
By placing a premium on the opinions of your customers, you are focusing on the people who will be making the buying decisions.
Important to know, customers don’t care about cost, they care about the value they are paying for. The strategy helps customers identify key value items (KVIs) as they decide on whether or not, your pricing and packaging is correct.
At this level, businesses enhance their consumer experience to customers. As a result, they grow strong brand image, and loyal customer base with increased demand and profit.
2. Helps in attracting customers based on their subjective assessment
Unlike cost-based pricing which involves adding up all the costs involved in creating and delivering a product, value-based pricing considers consumer experience. With it, the company enhances understanding of the value consumers get from the product.
Ideally, a product or service should be a solution to consumers. Value-based pricing is more common for services and cost-based pricing is more common for physical products.
To attract customers, especially if you are in the service industry, your cost-based pricing should not exceed the value that customers would put on your service.
You look for pricing information from the people who are going to make a decision depending on your price, your customers.
3. Helps business build the best product
Pricing isn’t just about the number of phone call enquiries, or the visitors on your website. Marketing experts advise that consumers purchase products or services hoping to get results from one of these 3 core desires: wealth, health or relationships.
Market desires can only be satisfied through consumer knowledge. The knowledge of consumers helps a business in designing product packages and features.
Once you have developed your minimal viable product, the features and product updates should be driven by consumer demand.
It’s important for every entrepreneur to know details of needs, wants and fears of the customers to build the best product.
As you let consumers help you set prices, remember other important aspects of the market, such as competitor prices. Not considered accurately, can lead to a loss in profit margin despite an increase in sales.
As an entrepreneur, you should re-evaluate your pricing strategy every 6 months, and if there is room to raise prices you should.
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