Value Based Pricing: Is It Right For You And Your Business?
Today specifically I wanted to mention Value Based Pricing, especially for service providers, digital product providers and other products or services that have very little ongoing or variable expenses related to them.
I know that pricing in general can be tough for some business owners. We can umm and ahh whether or not our customers will pay the price we are asking. It can feel vulnerable until a few customers come in and happily purchase what we offer at that price. Then we can finally sigh with relief that our prices weren’t too high or too low.
But when it comes to setting prices for intangible items, it seems to increase the overwhelm for some business owners. I believe this is because when you don’t have a fixed cost base to start from, e.g. buy a dress from the wholesaler and it costs $20, instead you created an online product and can resell it infinitely without a fixed cost over and over. It can become difficult or confusing.
It’s also difficult when you’re a service provider and you’re trying to price your skills and experience as well as expenses.
Potentially this is because in the ‘olden days’ most businesses used a ‘cost plus’ pricing strategy. This is where you pay the supplier for the goods and then add 20%, 30%, 40% on top, and hope that you sell enough to pay all other expenses and yourself.
But you can see when you don’t outlay a fixed amount for an item, how can you add 40% on top?
That’s why I’m bringing up Value Based Pricing today.
Value Based Pricing is a term used by many to price a product or service based on what the customer is perceived to be prepared to pay. It is not related to the cost of the product.
It is based around the customer’s perceived value for the product, solution or problem you’re solving for them. This is where it can feel uncertain or tricky. You may not know it in your business, but you are most likely already using value based pricing.
You are also experiencing it daily when you purchase items yourself. For example, the price of an iPhone is not related to its cost to manufacture. It is value based pricing. What is the perceived value to a customer to own a device (the smartphone) that solves all these problems, with also some status or brand awareness added in for good measure?
So how can you decide if value based pricing is for you?
– Do you offer a good or service that you feel needs to be priced in a way that is not related to the cost of manufacture?
– Do you offer a service that currently is offered in a dollar per hour scenario, but you feel that it’s time to unlink from this time based model?
– Have you created your own Intellectual Property around a product or framework and want to be properly remunerated for it?
– Would you like to price more of your offers based on the value received from the customer instead of the direct inputs (time, product, energy) from you?
If you answered yes, then this could be a pricing strategy for you.
(In the past the idea of value based pricing was used in a bit of a shady way, where ridiculously high prices, massive profit margins and under-delivering were linked to this idea. That’s not what I’m referring to here.)
As always, I encourage all business owners to price their products and services intentionally for a sustainable and profitable business. This may mean that this pricing strategy is suitable for only one of your products or services. It may be only one part of an overall pricing strategy, or need to be considered in line with their business model.
I hope you found this helpful and look forward to answering any questions you may have about value based pricing.
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