Pricing is one of the fastest ways to improve your return on investment, and there is a method for pricing that can increase your ROI fast. It’s called value pricing, lots of people think in terms of cost of goods sold and a bunch of other associated cost factors. Or if it’s a service, they often think in terms of hourly rates rather than value rates.
But most customers choose another option based on price, but if you focus on value you may get a different result. Let’s look more deeply at value pricing and learn how to do it.
What Is Value-Based Pricing?
This is a method by which you determine what your audience is willing to pay by focusing on your ideal customer or client to find out how much money they can afford to pay, are willing to pay, and will pay for certain features and benefits.
Let me give you an example … an engineer worked at a automotive car plant and for almost twenty years he designed and kept the automated machinery lines working… upon retiring he continued to work as a consultant. One day he got a call from a large automotive company, asking for help.
They explained that the automated assembly line was failing and that they need help to solve the problem. He agreed and visited the plant in question. He offered to solve the problem and asked for $50,000 dollars… the management eagerly agreed and he walked over to one machine and simply said… move this over to the left, by ten inches and the problem would be solved.
One of the junior managers thinking he could save a few dollars, stated that he had solved the problem in less than an hour and as such $50,000 dollars was expensive. Our engineer simply stated that they where buying not only a solution to their problem but also the knowledge to solve that problem that comes with over twenty years experience and as such was real value for money.
Who Is Your Ideal Customer?
If you don’t know who exactly your ideal customer is, you need to study them. You should be able to make a client persona sheet or create a client avatar that shows who they are down to what keeps them up at night and how they spend Sunday mornings when they’re not working.
What Makes You Different?
Be able to define what makes your product or service different than your nearest competition. This is an important factor because it will be used to determine the added value that you’re offering as compared to the competition’s. This doesn’t mean you need to price higher than your competition, though. You may choose to price lower due to other factors and end up with more of the audience if it increases your return on investment and is sustainable.
What Alternatives Are Available?
Make a list of all the alternatives your customer has available to them. These products are your competition. Note their cost, features, and benefits. Compare them to yours. It may help you to make a chart so that you can figure out where your added value lies.
How Much Value Do You Create?
Perform the same analysis on your product as you did your competitors’ products. Make a list of the value in dollar amounts of each feature and benefit that your product or service offers. That way you can see the worth in real numbers that can be calculated.
What Is Your Differentiated Value?
Compared to your competitors, what’s the difference in value that you offer? The way to figure this out is where you are different. That thing that makes you different is where your value exceeds that of your competition. This is where you may choose to price yourself higher, or you may still choose to price yourself lower but point out the differentiated value. Incidentally, you can even use this in the pricing you offer for different levels of your product, or with lifetime versions too.
There are many other benefits when you focus on value-based pricing. Your ideal customer sees the worth of your offering before they buy. They have an idea of the value implanted in their head when they look at the alternatives. Plus, if you already know you’re going to price based on value, you’ll develop better products and services with that in mind.