Without a doubt, pricing is the most important aspect of a business. It affects your business directly, and a small optimization in price can lead to a huge revenue boost if applied successfully.
There are three main pricing strategies depending on three main grounds: cost-based, competition-based and customer value-based. Cost-based, the most traditional method, is simply adding a fixed margin to your production cost to create the retail price. On the other hand, competitor-based relies on price-checking of similar products from different suppliers to price accordingly. While every pricing strategy has its own place, these two strategies don’t seem like a good fit for E-commerce. Cost-based puts you out of place with no references while competitor-based only makes you a copycat and a trend follower.
The answer to why these models won’t work is more than that: They don’t take customers into the equation. On the Internet where everything is just one click away, you earn your place not by facing thousands of competitors with a common product and price, but by fulfilling exactly what your customers need and desire. Thus came the customer value-based pricing strategy.
Instead of setting the price inwardly at your company or laterally like your competitors, value-based pricing enables you to look outwardly to your customers. And to customers, price is just a numerical evaluation of the value they are going to get purchasing an item. For example, autumn is coming and you see yourself in need of a new hoodie. If you only want a warm piece of clothing, you can go to the second-hand shop down the street and get one for just a few bucks. Yet you find yourself scrolling through numerous brands, searching for something that matches your fashion sense. Between two items, one significantly pricier, you opt for the more expensive one because the print is too cute and you just have to buy it. A customer’s willingness to pay depends on the value they put into the product, which is affected by hundreds of factors. Value-based strategy digs into this scenario and determines the degree of willingness of a target customer for your products.
Pros and Cons
First, the pros:
- Value-based profit: Your price is value-based, which means the more values added to your products, the more money you are likely to get from buyers. If done correctly and marketed to the right people, this pricing strategy will generate the most profit.
- Higher quality products: This approach requires beforehand research to acknowledge the expectations of customers and the prices they commit to paying. Along with the progress, you will gain insights into the target market in order to develop the product features to their preferences. By taking a customers’ perspective, you will know what exactly people are looking for, thus making your product a fitting solution. Driven by consumer demand, the perceived value of your product will be increased which leads to a higher price.
- Strong customer service: Excellent service is also considered a part of the added values. By focusing on the people who make the decision and create an unforgettable buying experience, you will be able to build a close relationship with them. If you are able to provide the claimed value that they need, the brand reputation will be enhanced as loyal customers keep coming back.
Then, the cons:
- Time and resources: Unlike other pricing strategies where you just stamp a price on the product and send it off, value-based requires a lot of effort on building buyer personas, market research, price sensitivity analysis, product development, strategic marketing, trial test, etc. And you don’t always get it right the first time, which means additional research and adjustments along the way.
- Exact science requirement: It is very difficult to put a price on how consumers feel and need. However, you have to utilize customer data and breakdown the relative value of different features of what your product is going to offer versus products from competitors to convince them that yours stand out from a hundred look-a-likes on the market. Once you have all the information, building the perfect product to capture the majority of customers coming your way is not going to be an impossible task.
Two Types of Value-based Pricing
- Good-value Pricing: Mainly used for non-expensive products, this type offers a balanced combination of quality and service for a fair price. Take H&M $5 clothing section as an instance, customers can have the value of the brand and quality product for a relatively cheap price.
- Value-added Pricing: In this alternative, suppliers attach additional features and services to differentiate their products and leverage the prices. The added details don’t aim for cutting prices with competitors but making the product stand out and appear valuable to the customers. Airlines is a prime example of this pricing strategy. While the main provided service is transportation from point A to point B, some people fly Economy Class while others prefer Business Class for the extra services, comfort and luxury it offers.