How Value Based Pricing Works
Value-based pricing is finding a price for your work based on the value of the business outcomes. The price given is usually a percentage perceived as fair based on quantifiable metrics.
This strategy sets prices based on how high clients perceive the value of your offering—the price is set by belief and trust.
For example, the average value of client leads is $500, and you estimate that your work will lead to them acquiring 100 leads in the first year—that’s $50,000 of value. You then work out a price for your work based on a percentage of $50,000—and if you can show the value, you can justify the price.
Companies with more perceived expertise are better positioned to utilize value pricing over companies that sell commoditized items. Clients with more money than time are more inclined towards value-based pricing. If a client doesn’t see value in hiring you over other, value-based pricing will fall flat.
Instead of rushing towards the bottom by competing on price, value-based pricing gives you high rewards if your expertise delivers value.
To increase your value, you need differentiators, including:
- A specialized service
- An individualized style
- Industry credibility
- Excellent soft-skills
- Attractive personality
To start value-based pricing and increase your value, you need to:
- Find who it’s for
- Know what it’s worth
- Prove what it’s worth
Why People Compete on Price
Most companies seek to gain customers with the low pricing of their products and services.
Famously known for winning this race was Henry Ford with automobile production. By merging the conveyor belt and assembly line, the time to create automobiles dropped to 93 minutes.
Lowering pricing is an advantage for market leaders who can survive due to their scale. Most small business owners and partners insecure about their product’s price validate decreasing prices by the primary anchor they see—established market leaders. But for most of us, winning with the cheapest product is a race to the bottom and a terrible idea.
Cheap isn’t respected
If your selling proposition is cheap, you’ll lose all your customers to the next company that shows up with a similar product but less expensive. And when you’re no longer the cheapest, you have to cut costs further or stop rushing to the bottom.
Their ability to devalue themselves and their offering is the value of companies selling with cheap. These companies are unable to win customers through merit, forcing them to fight for existence.
Lower pricing is advantageous only for companies capable of maintaining margins for similar or better products than competitors.
Cheap pricing is suspicious. You’re forced to compete against the higher quality of products that benefit from their higher prices—and people are influenced to perceive they cost more because they provide something better. Cheap products encourage questioning why they’re cheap—and usually, buying a cheap product means purchasing an inferior product that makes customers feel stupid. And a business that makes customers feel dumb is unable to build a sustainable business.
When you build a sustainable business with loyal customers, the price of your offering is of relatively little importance.
How to Find Who It’s for
To successfully utilize value-based pricing, you must invest time to understand the attitudes and aspirations of those you seek to change. The success of value-based pricing lies directly in your ability to perceptually enhance your product’s value in your client’s mind.
Begin by understanding that we all use narratives to navigate the world and acknowledge that every person’s narrative is different. By clearly understanding the desires, frustrations, and personalities of the people you seek to change, your business will be more effective.
A standard process is identifying different personas of customers. Give life to a persona with a rough sketch of their face and a given name and job role. Further exploration should include demographic information; for example, they live in the countryside, so they are less likely to use mobile ride apps. Capturing the specific customer needs and frustrations your product is trying to solve or the opportunity you’re trying to address is critical. Then, and only then, can ideas arise to meet those needs.
A persona should include:
- Sketch and Name
- Demographics and psychographics
- Pain points and needs
- Potential solutions
Qualify potential clients on first engagements by telling them you won’t be the cheapest option and asking if that’s okay with them or if they primarily buy on price. You’ll filter out those that only purchase on price, nudge the conversation towards the value you provide and gain respect from clients seeking value.
How to Know What It’s Worth
You have to believe in the value you offer. Your confidence and passion directly influence how the quality of your product is perceived. If you don’t fully believe in your value, pricing is second-guessed—vision without confidence is an engine without fuel.
Commoditization happens when the seller is not confident on the value of the product and the perceived value of the product resorts to price. Commoditization makes it difficult to sell at a higher price, and instead customers choose the lower-priced product. Being able to nudge the conversation into talking about the value of the product allows you to justify the price.
When you believe in the value of what you offer, a true belief that what you offer is beneficial, people are influenced and you will attract the right kind of people—people who want what you offer at the price your offer it at.
How to Prove What It’s Worth
Find proof through the success of current and past clients. Optimize the value perception of your offering further by having every employee understand the value you provide. All employees should have an answer to ”what is value, and how do we measure it?” The answer to that question will be unique to each company, influenced by its offering, location, customers, and strategy. Having this established answer lets companies utilize value-based pricing.