One of the most essential issues in every B2B firm is, "How will I price my product or service?" While this may appear to be a straightforward question on the surface, it offers up several price options. Today, we'll concentrate on one specific method: value-based pricing.
Value-based pricing is a pricing approach that bases the price on the customer's perceived value of the product or service. This is in contrast to cost-based pricing, which rates items based on a typical price or the product's cost.
Value-based pricing necessitates being proactive rather than reactive. You are not fixing your pricing because your rival has done so.
You demonstrate with your price that you are not just better than your rivals, but that you also offer something additional to the table that they may not have realized they wanted or needed.
Consider the case of Coach. What makes a Coach bag so much more costly than a standard purse? It is value-based because the client values its perceived value (status, distinction, and pride-of-ownership) more than the mere cost of production.
Apple is another wonderful example of this. This company's pricing is not determined by the cost of materials or how much their rivals charge. Their cost is determined by the value of efficiency, usability, and quality of life. Customers are willing to pay the higher price because they recognize the value.
Of course, value-based pricing in the B2Carea will differ differently from that in the B2B industry. However, the core principle remains: buyers want to know how your solution will affect their bottom line.
What is Value-based Pricing?
Value-based pricing, also known as value-added pricing or perceived value pricing, is another term for value-based pricing.
According to Utpal Dholakia, a marketing professor at Rice University, value-based pricing is "the method of setting a price by which a company calculates and tries to earn the differentiated worth of its product for a particular customer segment when compared to its competitor."
Worth-based pricing is a catch-all phrase for any pricing approach that analyzes a product's value from the perspective of the consumer and market.
Companies may create a framework that utilizes their brand, product characteristics, audience demographics, and market position by utilizing a value-based pricing strategy.
Let us now apply value-based pricing by carefully analyzing each element of the definition:
- Concentrate on a single segment. The first thing to understand about value-based pricing is that it always refers to a single sector. (In the case of B2B items, it may be a single customer.) Brand A is exclusively interested in big-screen TV customers, not all TV purchasers. Marketers cannot utilize value-based pricing unless they are targeting a certain demographic. If they have numerous segments, they must set value-based pricing for each one.
- Compare with the next best alternative. This price approach is only effective when the target group has a specific competitor's product to choose from. Value-based prices always ask, "What would this segment buy if my product was not available?" This "next best option" for the goal is the critical point of comparison for determining value-based pricing. The value-based pricing technique will not work effectively for really novel items with no peers.
- Understand the concept of differentiated worth. The following step is to determine whether product characteristics are distinct, that is, distinguishable from the competitor's offering. In our situation, Brand A's main distinguishing attribute is its greater screen size.
- Place a dollar amount on the differentiation. The final, and perhaps most challenging, stage in determining value-based pricing is estimating the cash worth of the unique characteristics. This boils down to us asking, "How much will big-screen TV buyers pay for an extra 5 inches of screen size?" and then double that amount (let's say $150) by $799, Brand B's pricing. Brand A's TV costs $949 depending on its worth. Marketers usually utilize research methodologies like conjoint analysis or qualitative consumer interviews to complete this phase.
As you learn how value pricing works, it becomes obvious that offering expert services has several advantages. The top five advantages are as follows.
The real businessimpact of the services. In a typical hourly pricing approach, the cost of delivering the service is prioritized. How much time will it take? Who is going to do the work? Your client is concerned about the cost of the service.
Will it be worthwhile to spend the money? Will it truly address my issue? However, under a value pricing model, both the customer and the supplier are concerned with the value obtained. Their interests are more aligned, which leads to improved communication and outcomes.
One of the most infuriating aspects of time-based billing is that it penalizes speedy and productive workers. The more proficient you are at a task, the less time it takes you to do it. In a time-based setting, a highly seasoned specialist may charge less than a bumbling beginner!
Because the client may feel the need to oversee your resource choices, this may raise administrative and operational issues. Different billing rates might help to compensate for the time difference to some extent. However, billing rates are just a rough approximation of the value that a top-level specialist may offer to a project.
In minutes, the appropriate expert may add thousands of dollars in value. Value pricing allows you to use resources as you see fit. And, perhaps more importantly, you can fully realize the benefit of a highly qualified specialist's increased productivity and additional insight into a project.
Nobody enjoys "billing shocks." When supplied correctly, value pricing should have no surprise costs. Before work begins, the scope and pricing are agreed upon. If there is a significant change, the price might be changed correspondingly (with a change order, for instance).
This approach, from a psychological standpoint, frees the customer from avoiding crucial inquiries or talks merely because they are scared of paying hourly costs.
Why would you invest in time-saving technology or systematic process optimization if it simply resulted in a decrease in revenue? This issue is eliminated by a value-based approach.
Instead, it encourages you to embrace any margin-boosting process or technological innovation that does not jeopardize the client output. Furthermore, if the technology or process enhancements offer additional value, that is even better.
Just though your charges are correct and fully recorded does not imply they do not irritate customers. “You charged me (insert the hourly fee amount) just to photocopy a document? That’s outrageous?” That is insane!”
If you are currently using time-based charging, you are probably all too acquainted with some form of this dialogue. These discussions are eliminated by value pricing. Hourly prices, as well as time and job specifics, are not visible to the client. Avoiding annoyance.
So, with all of these advantages, why isn't value pricing more frequently used in professional services? The reason is most likely because there are major hurdles to overcome when putting it into action. Here are some of the most prevalent, as well as some techniques for overcoming them.
Administrative processes inside a company can often create hurdles to value pricing. If your billing system creates bills automatically based on recorded time, there may be internal opposition to changing these procedures.
Similarly, if your businesspays employees and/or equity partners based on billable hours, value-based billing has the potential to flip that model on its head. Even if the modifications to your system are small, you may find opposition simply because many people detest change.
To overcome this obstacle, educate those who would be affected on the benefits of a value-based pricing strategy. Typically, the benefits surpass any related expenses by a significant proportion. Consider portraying your early movements toward value pricing as an experiment that can be scaled up or down as you gather expertise.
This is a widespread problem in many professional service sectors. Unless executives and billable employees have prior training and experience with value-based pricing, it may appear arbitrary and even dangerous. This frequently causes worry and hesitancy.
Typically, training and good experience will overcome this worry. And, of course, it is critical to have a methodical procedure in place for setting your price.
The model that we employ at Hinge and recommend to our clients is described below. It reduces the seeming arbitrary character of value pricing while retaining the flexibility to be adaptable when you face different business scenarios.
Business development is no longer just outlining what you want to achieve and how long it will take. You must now evaluate the entire scope of your offerings.
Do they truly tackle the underlying business problem? What is the worth of resolving those issues? Is your method more valuable than what a rival would do? How will you show that worth? Does the potential client believe you will keep your word?
Each of these questions has the potential to have a major influence on the price you may charge for your services. Many professionals will require a new way of thinking about the company development process, as well as the chance to acquire the skills required for success.
You must be both an excellent listener and a powerful presenter. Your proposal must be compelling in order to justify what may appear to the selection team to be premium pricing.
Above all, you must believe in your ability to add value. If you do not believe in the effectiveness of your strategy, the prospective customer is unlikely to believe in it as well.
Not every prospective client will see the advantages of value pricing. Even if they do appreciate it, they may not be able to act. Some prospective purchasers just cannot afford to pay the higher prices.
Alternatively, your approved contacts may be hesitant to request extra cash for fear of jeopardizing their job. And, just as you may have internal policies or practices that make administering value pricing difficult, your potential customer may as well.
While you may be able to overcome some of these obstacles, you may not be able to overcome all of them. You must realize that value pricing will not work in every circumstance.
Having said that, the gain is so significant that it exceeds any losses you may incur. Compare your closing % to your pre-value-pricing baseline.
Take notice of the profit margins on both value-priced and non-value-priced projects. What you will most likely realize is that the value-pricing strategy produces greater outcomes.
Time and materials invoicing can conceal a wide range of project management inefficiencies and blunders. If it takes longer, simply charge for extra hours.
In this case, the customer is responsible for all project execution risks. (It's no surprise they're nervous!) However, with a package pricing or value price model, you bear that risk.
(Look who's tense now.) You also inherit the virtually ubiquitous problem of "scope creep," which occurs when the client's demands change as the project progresses and they want more than was originally agreed upon.
If these changes extend beyond the initial scope, you may need to revise it. In most cases, this adjustment is done using a "change order," which specifies any modifications in scope and the corresponding extra expenses.
This value-based system is advantageous in many ways. It compels you to concentrate on the project delivery process and how it relates to the value produced. It tends to increase both efficiency and the client experience, in our experience.
However, committed work and training are required to ensure that you have a rigorous project management approach in place that maintains projects within scope and delivers the intended objectives.
That is why value-based pricing is so effective – it considers every aspect of the price and marketing mix. A solid value-based pricing plan, once developed, enhances your brand promises, keeps you nimble in the market, and offers you additional insights into what buyers want from your product.
Setting the price at the same level as one's rivals is what competitive pricingentails. A company, for example, has to price a new coffee machine. The firm's rivals offer it for $25, and the business believes that $25 is the optimum pricing for the new coffee machine. It decided to charge this amount for its own product.
Good-value pricing, which provides a good balance of quality and service at a fair price. Value-added pricing is the practice of applying value-added features and functionalities to an item in order to differentiate it and hence sustain higher prices.