What is a Value Based Pricing Strategy? - Omnia Retail

Value-based pricing is somewhat of an umbrella term for any pricing strategy that considers the value of a product in the eyes of the consumer ... Outofthe“basic”pricingstrategies,value-basedpricingisoneofthehardertopulltogether.Itrequiresdeepresearchintoyourtargetaudience,thebroadermarketasawhole,andcompetitorproductofferings.  Theresearchiswellworththeeffortthough.Whenyouexecuteavalue-basedpricingstrategy,younotonlyhaveaflexiblestrategythatfollowsmarketdemand,youalsolearnsignificantlymoreaboutyourtargetaudienceandcompetitors.  Likethispost?Today’sispartofaseriesonpricingstrategies.Wealreadyhavecontentaboutthehigh-runnerstrategyandcharmpricing,ifyouwanttoreadmore,butkeepyoureyesopenformorecontentlikethisinthecomingmonths.   Whatisvalue-basedpricing? Value-basedpricingisalsoknownasvalue-addedpricingorperceivedvaluepricing.UtpalDholakia,amarketingprofessoratRiceUniversity,definesvalue-basedpricingas,“themethodofsettingapricebywhichacompanycalculatesandtriestoearnthedifferentiatedworthofitsproductforaparticularcustomersegmentwhencomparedtoitscompetitor.” Value-basedpricingissomewhatofanumbrellatermforanypricingstrategythatconsidersthevalueofaproductintheeyesoftheconsumerandmarket.Byusingavalue-basedpricingapproach,companiescanbuildaframeworkthatleveragestheirbrand,productfeatures,audiencedemographics,andmarketposition.    Cost-basedpricingvs.value-basedpricing Value-drivenpricingandcost-drivenpricingaretwoverydifferentstrategies.  Cost-basedpricingisthemoststraightforwardpricingmethod.Itiseasytoimplement.Allyouneedtodoisconsiderthecostsperproduct,thenaddadesiredmarginontopofthat.  Withcost-basedpricing,there’snoconsiderationforhowyourproductcomparestoothersonthemarketorhowyourtargetaudienceperceivestheproduct.Ifyourcostsaretoohighandtheresultingmarketpricedoesn’tmatchtheexpectationsofconsumers,thenyouwillbeoutpriced. Value-basedpricingismorenuanced.Thisstrategyusestheeconomicprinciplesofdemandandconsidersinternalinformationaswellasexternalfactors.Withextensiveresearchintothetargetaudience,greatermarket,andproductspecifications,you’llcreateapricingstrategythat’sflexible,supportsyourbrandimage,andconsidersallmarketfactors.    Advantagesanddisadvantagesofvalue-basedpricing Value-basedpricingstrategiesarenoteasytosetup,buttheyarethemostadvisedpricingstrategyforareason.    Advantagesofvalue-basedpricing Considersinternalandexternalvariables:Value-basedpricinglooksatseveraldifferentfactorstomakesureyouconsiderallrelevantfactorswhencreatingaprice.Inmanyways,itismorestrategicthancost-basedpricingbecauseitletsyoudifferentiateyourselffromthemarket. Betterunderstandingoftheplayingfield:Value-basedpricingrequiresalotofresearch.Thisresearchgivesyouabetterunderstandingofyouraudience,competitors,andmarket. Moreinsights:Theresearchyoudoonthecompetitionandneedsofyourtargetaudiencecansparkideasforproductdevelopment.  Higherprofits:Inavalue-basedpricingmethod,you“maximize”yourpricebyaskingthehighestpossiblepriceyoucanbasedonperceivedvalue.Thismaximizesprofits;you,asaproducer,captureasmuch“consumersurplus”—thedifferencebetweenvalueperceivedbyaconsumerandthepriceofagood—aspossible.   Disadvantagesofvalue-basedpricing Complex:Avalue-basedpricingcanbedifficulttoimplementbecauseitisacomplexprocessthatinvolveslotsofresearchandanalysis. Timeconsuming:Becausethereissomuchresearchandanalysisinvolved,creatingavalue-basedpricingstrategytakestimetosetup.    Howtosetupavalue-basedpricingstrategy Nowthatyouknowwhatavalue-basedpricingstrategyis,it’stimetostartcreatingone.Hereareallthestepsyouneedtofollowtobeginbuildingyourstrategy.   1.Researchyourtargetaudience Howisthevalueofaproductdetermined?Throughmeticulousresearch.Unfortunately,thereisnosimpleprice-valueequationthatyoucanapplyacrosstheboard.Instead,youhavetorelyonresearch,whichisthefoundationofeveryvalue-basedpricingformula.  Youcanstartinafewdifferentplaces,butinacompetitivemarket,perceivedvalueisdeterminedbyconsumers.That’swhywerecommendbeginningwithresearchingyourtargetaudienceforaclearunderstandingofhowtheproductaffectstheirlives.  Thisresearchwillbeacombinationofdemographicinformationonyouraudiencecombinedwithqualitativeinformationyoucangleanfrominterviews.Sure,youwanttoknowwhattheincomelevelisofyourtargetaudience,butit’smoreimportanttoknowtheproblemyou’resolvingwithaproduct,andwhattheyarewillingtopaytosolvethatproblem.  Youmayalreadyhavealotofinsightsinyourorganizationfromproductdevelopmentresearch,soreachouttotheproductteamtoaskforinsights.Butdon’tbeafraidtoreachouttoyourexistingcustomerstoaskmorequestions,especiallyifyouareinchargeofmarketingtheseproducts.Youshouldcreatestrongconnectionswithyourexistingcustomerbasetounderstandhowtheyviewyourproduct,whatfeaturestheyaremissing,andgetotherfeedback. Related:Howwillthecoronavirusaffectretail?   2.Researchyourcompetitors Manycompaniesbelievethatvalue-basedpricingisallaboutthevalueoftheirproduct.Buttherealityisthatyourproduct’svalueisonlyrelativetothemarket,andyouneedcompetitorpricinginformationtobuildavalue-basedpricingstrategy.Ifyourproductis€900moreexpensivethanyournextclosestcompetitor,you’dbetterhavesomejustification.Ifthereisn’tenoughvaluecreatedintheproduct(anditsmarketing),consumerswilloptforthecheaperalternative. That’swhycompetitiveresearchisthesecondstepinvalue-basedpricing.Atthispoint,yourgoalistolookatthenextbestalternativesonthemarketandunderstandwhatmakesyourproductdifferent.Atthispointyou’llwanttolookatactualfeaturesoftheproduct.  Askyourselfifyourproduct...   Lastslongerthanthenextbestalternative Looksandfeelslikeit’smadeoutofqualitymaterials Offersmorefeatures(likealongerbatterylife,forexample) Costsmoretomakethanthecompetitor’s Ispricedhigherthanthemarketaverage   Again,youmayhavealotoftheseinsightsfromyourR&Dteam,sogoaheadandreviewthecompetitorproducts.Youcanalsouseapricecomparisonsoftwaretohelpyougetmoremarketinsights.   Priceelasticityandvaluebasedpricingstrategies Priceelasticitydataisextremelyusefulintheresearchphaseofbuildingavalue-basedpricingstrategy.“Omniacancalculatethepriceelasticityofaproductanduncovertheconsumers’willingnesstopayforaproduct,”saysJelmerReijerink,anOmniaConsultant.“Ifyoucanaccessthisdata,you’llbeabletouncoverevenmoreinsightsabouthowthemarketrespondstoyourproduct.”    3.Determinethevalueofyourdifferentiation You’vedonealltheresearch.Nowit’stimetoputaquantitativevalueonthedifferentfeaturesyouuncoveredinsteptwo.  Todothis,askyourselfhowmuchthekeyfeaturesonyourproductareworth.Howmuchisextrascreenspaceworth?Whataboutalongerbatterylife?Whataboutbetterqualitymaterials?Assignanamountthatreflectshowmuchthatfeatureisworth. Youdon’tneedtoassignvalueforeverysingleproductfeature;youonlyneedtocalculatethevalueofthefeaturesthatmakeyourproductdifferent.Thisisabrilliantlysimplewaytoavoiddoingalotofunnecessarywork.  Related:Howtodefineyourcommercialobjective   4.Craftmarketingandpricingcampaignsthatmeetyourtargetmarket’sneeds Afterunderstandingtheneedsofyouraudience,yourcompetitor’salternativeproducts,andwhereyourproductstands,youcancreateavalue-basedpricingstrategythatisoptimizedforyourproduct.    Whatisavalue-basedpricingstrategyinmarketing? Startwithmarketing.Thefirstthingmarketersneedtodowhenbuildingavalue-basedpricingstrategyistodecidewhethertoaddvalueorfocusonfeatures.Thisiswhereyouneedtogetstrategic.  Therearetwobasicvalue-basedpricingstrategies.    Goodvaluepricingstrategy Agoodvaluepricingstrategyfocusesonfeatures,notvalue.Thegoalistomakeconsumersbelievetheyaregettingagoodproductatafairprice. Whencreatingmarketingcampaignsforthesetypesofproducts,marketersdon’tneedtofocusonbuildingalotofadditionalvalue.  Instead,createacampaignthatveryclearlysolvesyourconsumer’sproblemandhowyourproductsolvesit.Highlighthowthefeaturesofyourproductsolvetheseproblems.  Goodvaluepricingisgreatformore“basic”productsthatdon’thavealotofextrafluff.Theseproductsalsotendtobelessexpensiveandmaybesusceptibletotheropoeffect.   Valueaddedpricingstrategies Value-addedpricingandmarketingstrategies,ontheotherhand,focusonbuildingtheperceivedvalueofaproduct.Thisisoftendonetojustifyahigherprice.  Unlikeagoodvaluepricingstrategy,avalueaddedstrategyfocusesonwhatmakesaproductdifferentandunique.Youdefinitelywanttolookatfeatures,butthefocusofyourcampaignshouldbemoreonthebenefits.  So,ifyou’reamarketercreatingacampaignforaluxuryorhigh-pricedproduct,it’stimetodustoffyourtextbooksandrevisitMaslow’sHierarchyofNeeds.Addvalueatthetopofthepyramid:focusonhowyourproductmakessomeonefeel.Willtheproductboosttheirsocialstatus?Willithelptheconsumerreachtheirfullpotential?Buildvaluearoundtheseideas.      Exampleofavalueaddedpricingandmarketingstrategy OneofthemostfamousexamplesofavalueaddedstrategyisDeBeer’sDiamonds’famoustagline“Adiamondisforever”.  Theline,writtenin1947byFrancesGerety,foreverchangedthediamondbusinessandhelpedjustifytheexorbitantcostofengagementrings.Thecampaignreshapedthewaywelookatdiamondrings—DeBeersframedtheproductassomethingthatwasanessentialdemonstrationoflove. Tothisday,diamondengagementandweddingringsare,formanypeople,anessentialpartofamarriage.It’sanaccomplishmenttopurchaseorreceivearing,andit’sademonstrationofsocialbelongingandlove.     Whataboutbrandvalue? Toconsumers,valueisbasedonseveralkeyfactors,oneofwhichisbrand.Thisisespeciallytrueforluxurybrands.Whetherit’saLouisVuittonpurseorNikeAirJordans,brandvaluegoesalongwayinjustifyingahighprice.  Retailersmightalsowanttoconsidertheirperceivedbrandvaluewhenbuildingavalue-basedpricingstrategy.Ifyouofferaluxuryorpremiumserviceasaretailer,youmaybeabletoraiseyourprices. Butfactoringbrandvalueintoyourvalue-basedpricingstrategyistricky.It’sdifficulttocalculatebrandvalueinawaythatletsyouquantitativelyaddvaluetoeveryproductinyourassortment.Your“brand”ismoreoffeelingaboutyouroverallcompany,nottheindividualproductsyouoffer. Thatsaid,brandvalueisanimportantpartofyourcommercialstrategy,andyouwantyourpricestoreflectyourbrandpromises.Assuch,avalue-addedstrategyisagreatwaytobuildbrandvalueacrossyourassortmentandjustifyhigherprices.   Conclusion Thekeytosuccessfulpricingistomatchtheproductwiththeconsumer'sperceptionofvalue.Andwhilecost-basedpricingisasimpleframeworkforapricingstrategy,itdoesn’tconsidertheconsumeratall.  That’swhyvalue-basedpricingissopowerful—itfactorsineverypartofthepricingandmarketingmix.Onceestablished,agreatvalue-basedpricingstrategystrengthensyourbrandpromises,staysagileinthemarket,andgivesyoumoreinsightsintowhatcustomerswantfromyourproduct.  SignupfortheOmniaPricePointsnewsletter Wewillupdateyoutwiceamonthaboutthelatesttrendsandhelpyoubuildmoreprofitablepricingandmarketingstrategies.