Pricing is the most critical element of an ecommerce business. All stores need to consider value-based pricing as a powerful marketing tool — especially small businesses that want to stay ahead of the game. Value-based pricing is the best way to set your store up for success.
A value-based pricing model is a strategy in which a company prices and advertises products or services based on tangible or perceived value.
What is Value-Based Pricing?
A value-based pricing model is a strategy in which a company prices and advertises products or services based on tangible or perceived value. This means that the pricing has little to do with time or cost involved in producing a product or service and everything to do with the value that a customer gets from it. For example, if a product costs $10 to create but is able to save a customer $1,000 over time, then it might make sense to charge $500 for it.
The Value of Perception
The idea of "perceived value" is the most important part of value pricing. The way that your customer perceives what your product or service is worth is the most critical element of marketing for a business of any size. But business owners have to be sure to focus on the potential customer's perception instead of focusing on their own perception: these are very different concepts, but it can be easy to mistake one for the other.
Just because you perceive your product to be of a certain value doesn't necessarily mean that your customers share your view.
Just because you perceive your product to be of a certain value doesn't necessarily mean that your customers share your view. This can sometimes lead to people assessing your items as being priced too highly. But if you stick to value-based pricing and have an accurate view of what value your product provides to your customer this should never be an issue. You want your customers to perceive the pricing of your products and services as a good deal but also feel that you are making just the right amount of profit.
Advantages of a Value-Based Pricing Model
There are many advantages to using a value-based pricing model, and it can often prove to be a win-win scenario for both your business and your customers. It ensures that they are willing to pay the prices you have set and also that they feel happy to receive the product they are getting. It can be a huge boon for your brand. Here are some of the many advantages to a value-based pricing strategy.
High Profit Margins
One of the biggest ways that small businesses can benefit from value-based pricing is huge profit margins. In most industries, once you have a product on the market, it generally costs very little to replicate it and so the higher price point you can choose the more profit you stand to gain. After you have recouped the initial costs of building/developing the product you can choose a price point based on its actual value that allows for rapid growth of your business.
Value-based pricing works best for specialty products and very specific audiences.
Specialization
Value-based pricing works best for specialty products and very specific audiences. If you are able to highly specialize your product it will differentiate it from your competitors and also allow you to command a higher fee because you have cornered a niche market. Specialization allows you to differentiate yourself in the way that you are marketing your product.
Stability
Value-based pricing tends to be strong even in economic recessions. If a customer feels happy about a product (i.e. if you have made a good enough case in your marketing to justify them spending money on it), they will be more willing to pay for the product, even if money is tight. It's a wise strategy to use all of the time, but especially so in times of financial uncertainty.
Value-based pricing actually allows you to focus on the quality of the product and even develop better products.
Better Products
Instead of pricing your products by simply undercutting competition or trying to provide a great deal for your customers, value-based pricing actually allows you to focus on the quality of the product and even develop better products. You'll actually be getting compensated for the ways you are satisfying your customers so you will have more profit to devote back to improving your products. Again: it's a win-win for both businesses and consumers.
Better Performing Campaigns
With value-based pricing you can ensure that your marketing campaigns will perform better too. You will have a better understanding of which of your products are really appealing to consumers because they are willing to pay a higher price for them. This helps to put your marketing dollars to better use and enhance your conversion rates overall. Playing around with different price points will help you find the sweet spot for your products.
No matter what your ultimate goals are as a business, you need to know how your prices are sitting with your customers and how they compare to prices that your competitors are offering. Adapting a pricing strategy that works for your brand and underscores the value a consumer is getting by purchasing your product is an excellent opportunity to meet your customers' needs and boost the overall success of your business.
Have any questions about value-based pricing? Let us know in the comments!