Value based pricing is by far the most discussed and most interesting pricing method out there. It’s also the best.
In theory, it could be applied to almost any pricing situation. Depending on your business, value based pricing can be a game changer, however, you need to be aware of its limitations.
There are two main ways to understand value pricing.
The more classical one, is usually applied to products and productized services that only have some differences when compared to competition. “It’s the same, but mine is better because of X, Y, Z.”
If those differences have a value for certain buyers, you can set a price on them. Determining who this people are and the value they perceive, is the task you end up with. Communicating those differences to the right people is how you position yourself.
The other way of applying value based pricing is more suitable for custom services or even custom-made stuff. In this scenario, you solve a problem for the buyer. If the problem is big enough for the buyer, you can charge a lot for solving it.
Only the perceived value counts, not how much you spend to solve the problem.
For some, it won’t be that big of a problem, so you might not be able to solve it and still make a profit.
Solving big problems for “big” people is where you want to be positioned.
If your business isn’t positioned properly, value based pricing can be even impossible to implement.
By not differentiating your product from others, you put the buyer in a difficult position: having one to many choices. Choices complicate decision-making. It’s a conflict that needs to be solved.
There is a solid chance your buyer wont toss a coin to make the buying decision. To solve the dilemma they will search for some differences. If you ever researched for hours before buying something, you know what I mean. This is natural. Comparing stuff is how our brain functions. Finding even tinny differences and establishing a hierarchy for the buying options, is how we solve the conflict.
This is why price-comparison and product-testing websites have thrived.
So, if your product is a commodity (others sell it too), you are most-likely forcing the buyer to compare prices. You are competing on price. You’ll need to “go low”. I don’t need to tell you how that ends.
A good positioning makes your product or service unique in the eyes of your buyer. This “One of a kind”, adds value to your product or service and this perceived value is what it’s all about. It also helps solving the buying decision conflict. They will thank you for this.
Here are the best positions to sell from:
- Expert: you are seen as THE expert in your field – you are the safe option, most likely to solve the problem, the buyer can’t afford the risk
- Brand: you have grown a brand name, so even if others sell the same stuff you get all the love
- Problem solving: you solve a problem that others can’t – even if you are not THE expert in you field, if you’re the only one who can solve this, you get to be the only choice
- How you do it: the way you solve the problem is unique in some way. For the ones that appreciate this, you are the one.
- Demographic: you are the only one that can speak to this people – language, culture, tradition, race, sex, age, usually, a unique combination of those.
I realize how exceptional these examples are. Being the number one expert or the only one capable to solve a problem is rare or at least time limited.
The solution is straight forward: use a combination! Be an expert, with a good reputation, who knows to solve a problem in a good way and who is able to communicate to a specific buyer.
Making it easy for the buyer to identify you as the obvious choice is what positioning is all about.
Combining it with value pricing is THE key to success and prosperity.