Value Based Pricing
Pricing can be a complex task to get right. The rewards of correct pricing show up in both customer retention and your balance sheet. One relatively unknown form of pricing is Value Based Pricing. You guessed it! Like the name says it is linked to perceived value by the customer of the goods or services you are offering.
What is Value Based Pricing?
It is a method of setting price based on what value the customer gets or perceives they derive from your product or service. At one end of the value based pricing scale the value received by the customer is taken into consideration when setting a price. For example a financial planner might look at the financial gains that customer will generally receive over the next 12 months from the plan and incorporate that into the initial plan fee. At the other end of the value based pricing scale, each individual customer may be charged a different fee based on the specific value they believe they are receiving from a product or service.
When is it Used?
Value Based Pricing is used most often in services where value gained can be measured financially. Services often have a variation in price structure which enables value based pricing to be possible such as accountants, financial planners, insurance brokers, consultants etc. An accountant may save you $5,000 in tax and that saving could be valued at $1,000. The amount of work that it took for the accountant to achieve that saving might have been $500. Under value based pricing they charge $1,000.
What Makes it Work?
Some key components required for successful implementation of value based pricing are:
- must have access to and understand your customers.
- your customers must place high value on your products or service.
- value of the product or service must be communicated often.
- your product or service must consistently deliver value.
Before looking to change your pricing structure to value based pricing, conducting research into your customers’ perceptions is a good first step. AP Marketing Works can help you design your research, collect information and interpret the results. Contact Ailsa if you need assistance with this form of customer research.