Understanding value added pricing strategy and ways to use this pricing tool:
When you create unique way of doing business and you offer exceptional value for your customer – price becomes less relevant. You should price your products and services based on the value they provide for your customer.
Unfortunately, many companies make pricing decisions based on the cost of making their products and the costs of providing their services, even when they don’t have to use this cost-price approach.
Smart value-based pricing is critical for increasing your profitability. If you have ever accepted bids for a project such as construction, moving, or painting, other buyers might have apprised you that accepting the average bid, the one that falls in the middle, might be the best option.
If you have ever purchased a large ticket item, you understand why consumers might question the quality and effectiveness of an item that is sold below cost. The same applies to your pricing. The psychology of pricing and the perceived value of your offers are more important factors than your cost structure.
Yet many business owners are afraid when it comes to making pricing decisions. Many don’t feel comfortable that they can charge above average price for what they do. Many others are focused on using the old fashioned cost plus margin pricing model and leave money on the table.
Fact is that nobody cares about your cost. Your cost structure is your problem. Your customers care about themselves and the benefits they receive from your company. So the actual and the perceived value you are able to provide for them is what really matters in pricing.
By changing your mindset about pricing you will achieve higher margins and create better products and services.
The pricing logic is simple – provide more service or higher quality service and you can charge more when you target the right customer. If there is a large segment of price sensitive customers for your business you can simply create a basic version of your product or service and charge less for such a product or service.
However, keep in mind that in every business, industry and market there are customers who need more of what you do and are able and willing to pay you more when you create the right mix of products and services targeted for them.
At the same time, there will be customers who just need the basic service or product without any extra benefits, but this is not a reason to cut all your prices. Pricing is really related to the packaging and creation of targeted products and services and this is why you should have a strong offer at each price point. Each and every business, including your company can create the basic, standard and advanced version of what they do.
When you focus on low prices in order to be more competitive and get more customers you are actually creating another potential issues. Many prospects and customers might not take your product or service as seriously as they should because low prices can communicate low quality. Most people, especially those who are not familiar with your product and service, will use the “expensive means high quality, cheap means low quality” logic. Another issue stands applicable as well: When you find you have good reason to increase your costs, to add a service or upgrade a product, for example, your customers are likely to complain simply because they are accustomed to your too-low price way of doing business. Make sure that your product or service is unique in some way compared to any other alternative for your target customer.
Put yourself in your customers’ shoes and ask yourself these questions: Why would I purchase this particular product? If you sell the same product like your typical competitors, then perhaps you can increase the warranty time or technical assistance offered, as an example.
Try to provide a product or service that stands apart, something that your competition does not offer already. If they do offer it, try to put a different spin on your idea. If yours is the only one available, customers will have no choice but to accept your price range.