Find out if value-based pricing is the right study for you to work out the best price point for your product

Value-based pricing uses customer perception as a way to determine the price point of a product. Instead of basing the price on how much it cost to manufacture, or how much a previous product was sold for, you base your retail price on the perceived value to the customer.

For example, if you’re selling a printer that cost $50 to make, and your customer expects to pay $100, you could expect to make a $50 profit. But if they expect to pay $30, you would take a hit on the price and try to recoup your manufacturing costs elsewhere.

Competitor influence on value-based pricing

Competitor prices play an important role in value-based pricing. In fact, the method works best when deciding a price point for products that have close competitors offering virtually the same proposition.

The competitor’s price will have a strong influence on customer expectations and can be used as a basis for your own pricing options. Looking at the features your product has in common with the competitor product, you can establish the dollar value of them as a package.

To return to the printer example, say a competitor’s printer has the same weight, paper capacity, dots-per-inch, pages-per-minute etc, but yours has the additional benefit of being wireless.

You know that the cost of the competitor’s printer is the value of your printer minus its wireless capability, so all you then need to do is work out how much being wireless is worth to your target customer.

Limitations and drawbacks of value-based pricing

It’s easy to see why value-based pricing is popular. After all, a product is unlikely to succeed if its price is more than a typical consumer is willing to pay. But there are a couple of caveats…

  • It needs an existing product niche
    Value-based pricing only really works if there’s a product already out there with very similar, like-for-like features. If your item is a completely new innovation, you won’t be able to draw a meaningful comparison.
  • Brand isn’t taken into account
    Assigning a dollar value to technical features is relatively straightforward. But there’s also the aspect of product value that comes from your brand, which is far harder to measure. For this reason, value-based pricing works best in markets where brand isn’t a major influence on consumer decisions. Printers – probably OK. Fashion garments – less so.
  • You’re dependent on competitor pricing
    Using competitor prices as a basis for your decisions means if they’ve priced a product too low, you’ll share the negative consequences.

 

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