Setting Prices Based on Value Attracts Better Customers
By Mark Wardell @MarkWardell | August 31, 2008
Whether we like it or not, people don’t buy the hours and money us entrepreneurs sink into the development of our products and services. All they’re really interested in is what those products and services can do for them. In other words, the benefits they receive. And in the end, their willingness to open their wallets is directly linked to the value they attribute to those benefits.
This is hardly a new concept, of course, and yet "cost-based pricing" continues to be the most pervasive method of pricing used in the market-place today.
Cost-based pricing is a method of calculating all of the costs associated with delivering products or services to a customer, and then adding on a desired mark-up to determine the retail price. The problem is, while this might make perfect sense to the seller, it doesn't make any sense to the buyer. Because the buyer doesn't care what it cost you; the buyer only cares what it will do for him or her.
That's why "value-based pricing" has become for many a favourable alternative.
Value-based pricing is pricing based on the value that the product or service brings to the buyer. It's a great alternative, because when a product or service offering can be repositioned so that it has a clear association with its benefits, the seller has an easier time attracting and selling to his or her target customers. First, because value-based pricing helps customers more readily understand the benefits they'll receive, and second, because it facilitates reaching customers who care more about value than cost alone, and are thus more willing to pay for the products or services.
Most businesses find that by positioning their offering in terms of its value, they also reap the rewards of stronger, more powerful brand recognition, which helps eliminates the need to compete with other businesses based on price alone (never a good thing).
To consider value-based pricing for your own business, start by brainstorming how you might repackage or bundle your offering in a way that increases the value it brings to your customers. And then charge accordingly.
For example, you can begin to build value into your offering by including some form of customer service, such as a product warranty, free installation/delivery, or access to a toll-free help line. Or you might consider offering convenient payment options (such as a monthly or yearly payment plan), free product training materials such as an online manual, or free product updates. Use your imagination. The idea is to ratchet the value up so high that price is no longer an issue.
This will look slightly different for a business that sells professional services, such as a law or accounting firm but has an equal impact. Because, again, these clients value the benefits they receive from the services, not the number of hours the lawyer or accountant puts into their file.
Therefore, anything a service provider can do to increase client benefits, without significantly adding to the cost of services, will allow a firm to increase its fees and grow its margins.
For example, an accountant could offer fixed price contracts that include bundled services, such as unlimited phone calls, tax returns, ongoing tax support, monthly financial statements, payroll services, etc in a variety of bundles, for a monthly fee.
Structuring fees around value gives a firm the opportunity to significantly grow its profit margins, by increasing internal systemization. For example, an accountant could focus his or her team on increasing efficiencies around file preparation, by creating a system whereby there are no file mistakes by the time the file gets to the reviewer. The fixed price remains the same for the client, but internal efficiencies translate to a healthier bottom line for the firm, which isn't possible when rates are based on accumulated hours alone.
Though still far from being the status quo, among the businesses - of all kinds - that I've seen who have embraced it value-based pricing has enabled them to become more systematic and profitable, with the ability to offer better and more appreciated client services.