Can A Small Cost-Plus Business Earn More With Value-Based Pricing? 🔋
When we speak of pricing strategies, there are a lot of concepts that come to our minds. Competitive pricing, price skimming, cost-plus pricing, penetration pricing, economy pricing, dynamic pricing, and value-based pricing — are among the many approaches you can choose from for your business. Most of the time, pricing experts would tell you that their favourite is value-based pricing vs cost based pricing. Are you interested in learning about value-based pricing?
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In value-based pricing, customers pay based on the value they get from a product. It matches what the consumer is willing to pay for a product that provides the solution they require. Therefore, a value-based pricing strategy requires a rare blend of technical expertise and a diverse range of thinking and management styles.
At Value Culture, we believe that when making pricing decisions, managers should always weigh their options. In this article, we will have the most comprehensive discussion about value-based pricing. We will talk about value-based culture in business and why it is important. Then we debunk the facts and myths regarding value-based pricing. We weigh its advantages and disadvantages. Next, we will guide you on various ways value-based pricing can be utilised.
By the end, you will be equipped with the best knowledge cost based pricing vs value based pricing, plus you will also know which one is best fit for your business.
Table of contents for this article includes:
I. Cost Based Pricing vs Value Based Pricing: The Power of Value Focus If You’re a Cost Plus Business
II. Cost Based Pricing vs Value Based Pricing: Articulating Value, Not Price and Why It Is Vital
III. A Quick Guide to Cost Based Pricing vs Value Based Pricing
IV. Cost Based Pricing vs Value Based Pricing: Separating Facts from Myths
V. What Is Value-Based Pricing Strategy and How Can You Utilise It?
VI. Strandbags Uses Customer Value Pricing Strategy To Make Its Comeback
VII. Check Out This Humorous Cost Based Pricing vs Value Based Pricing Example!
VIII. Cost Based Pricing vs Customer Value Based Pricing: Profits Soar With Adaptive Pricing Team
IX. Overcoming Strategic Overload with Pricing Strategy as a Value-Based Proposition
X. Benefits Of Value Based Pricing For Pet Care Businesses Planning To Raise Prices
Cost Based Pricing vs Value Based Pricing: The Power Of Value Focus If You’re A Cost Plus Business
I wanted to start today by sharing a personal story about the power of value-based pricing. This is based on an experience I had as a customer, not a practitioner or expert. I think understanding what a value-based pricing strategy should be done from the customer’s perspective. This is to give you a deeper sense of how customers experience or deal with your cost-based pricing strategy (or even the lack of a value-based pricing model).
When I was twenty-one years old…
I went to the Tate Modern in London with my dad for the first time. It was 2000 and the very first year the gallery had opened the building to the public. It was also the first time I understood the value of valued based pricing. My dad and I had talked for many weeks before our visit about all the wonderful pieces of art we would see there. We were also aware of the high price of entry for private exhibitions. But we were still prepared to go.
For my dad and I, art, books, and films were our primary activities in London together. Art helped us explore and challenge what we valued and why (as opposed to what we thought we valued). I had my dad right beside me explaining why he valued a certain piece of art. However, I was also free to discover the value of the same piece of art inside my mind and with him as well. In addition, I had the idea that Tate Modern was going to be the best place to test our assumptions and share our views.
I had a vision in my head of people wandering through the rooms and debating great art. Sharing their knowledge, opinions, views, and feelings…
What I found, though, was that Tate Modern was more like an abattoir without the rib-eye steak. The very first moment we got there, I noticed the stone-cold silence. No one was talking or sharing views or ideas. We went to the counter to buy tickets for a Damien Hirst exhibition. An extremely gaunt, Avant-Garde staff member gave us our tickets with a very serious expression. He then began his set spiel on how Damien Hirst’s ‘Cow’ was the spirit of Tate Modern.
This made me wonder, how can dead animals (including a shark, a sheep as well as the cow) hanging, preserved and suspended — and sometimes dissected in a tank full of formaldehyde – capture the value of the Tate Modern. By any standard, the Hirst exhibition pales in comparison to the space in which the cow floated (the old OXO building – a landmark in London).
I turned to my dad and said if that’s all the value they can offer us, we should skip the exhibition and just walk around the building. We didn’t do that though. We paid nearly 40 dollars each to see Damien Hurst’s Cow exhibition and zero dollars to explore the building.
As I was walking around the exhibition, looking at all the dead animals floating in harsh chemicals, I couldn’t figure out for the life of me why we were supposed to be so impressed by this? What the value of it was, or why the ticket price was so much money?
I walked around the room in silence; feeling slightly queasy along with everybody else.
I did my best, I tried very hard to appreciate the ‘Cow’ as a valuable piece of art. But, I couldn’t see it. I just walked around the exhibition in a dissociative state. Waiting for the time that we could get out of the room and walk freely around the rest of the building in peace.
I did try to share my views with my dad as we walked around the abattoir – I mean the gallery. But the first time I said something to him, an arty-looking person overheard and glared at me with contempt, like “What do you know about art you philistine?” And then the second time I tried, I read a sign beneath the dead Cow’s head – on its tank – explaining that the true value of Damien Hirst was his ability to capture the spirit of our age. I looked up at the cow and back at the sign. Up at the cow and then around the room. Did this dead cow capture the spirit of our age?
Not to me, it didn’t. I thought this gallery is firmly set on telling me I’m wrong, and that their view on value was the definitive view. I suspected bashing my views and destabilising my value system was their way of making more money. They had a captive audience of uninformed visitors willing to pay a lot of money for something they didn’t even like or understand. Visitors were pretty much paying to be herded around like cattle in a relatively small room filled with dead animals. Being told at every step, how to think, feel and react to their surroundings. Maybe Damien Hirst is onto something here after all.
Explore my views
So, I didn’t explore my views with my dad as I would have done in the past. Never have I shared these thoughts with anyone until now. I sort of suppressed my true thoughts and reactions. I think I only returned to the gallery again once after that too. The second time was the same, but this time I skipped the exhibitions and just walked around the building for free.
I felt kind of guilty about stifling my views too. At the time, I felt as if my views were not important and not valued. I was angry with the gallery for silencing me and making me self-conscious. The whole experience seemed like a framing and anchoring exercise. Positioning the gallery as a font of all knowledge and visitors as ignorant. I thought it was very clever of Saatchi to use a magnificent building with lots of rich history and cultural significance to frame worthless pieces of art and then later sell them for millions of dollars to private collectors.
Why Explain Cost Based Pricing vs Value Based Pricing?
I tell you this story about the Tate modern. I could have told you fifty business stories very similar to it. Executives were bewildered about why their customers were asking for price reductions? Or even prepared to bear the switching costs to an alternative supplier when they, in their minds, were the top incumbent. At the same time, the same executives could not explain the value of their offer to their customers. Or why their customers were so unhappy to find out that someone else was charging substantially less for the same thing.
Sounds a bit like the Tate modern story again, a business:
- Telling customers they have no right to complain when they were getting a poor service
- That doesn’t care about their customers’ value
- That thinks incumbency is a safety net for everything
- Overcharges and under-delivers with a bad attitude to boot
- That doesn’t even realise that it’s their job to be trying to give customers a great experience
The Tate Modern
Like the Tate Modern, it is easier to shut down any dialogue with customers and expect them to cough up the money. Even when they’ve had a terrible experience with you! I suppose, when you shut out customers, you don’t have to face feedback like “your offer is of limited value, I want my money back or a discount to compensate for what you’ve just put me through…”
It’s not just a shame when price discussions turn into verbal bashing about how useless and no good your business is. It is a real loss. A loss for you, your team, your peers, your customers, and your business. When it comes to re-evaluating pricing, we need leaders and innovators challenging the status quo and proactively trying to understand customer viewpoints, pain points and problems (even if it is a bit difficult to stomach sometimes).
Asking more questions
We need managers not just offering discounts at the first sign of trouble. We need more people asking questions to uncover how we can help customers: achieve their financial goals, make their lives easier and fix their problems.
This includes listening to staff and customer feedback and doing something about it. Not believing incumbency is enough – because it’s not. And it is building world-class teams with the right mix of skills, styles, and capabilities. They drive a value-based pricing strategy in a tough market and business culture of staunch cost plus values and beliefs.
To overcome the emotional bias for the status quo in your business, you need to understand what value-based pricing is. So, what’s the difference between cost-based pricing and value-based pricing? Cost-based pricing strategies and methods try to control customers and the market by simply denying that they exist.
Businesses that use cost-based pricing vs. value-based pricing tend to do overly complex cost allocation analysis. There’s an overly simplistic mark up to finish off to set unrealistic margin targets. They also seem to believe that it’s okay to have their sales teams bashed daily by procurement. They sit through the painful process of procurement, unpicking their finance or marketing team’s irrational cost plus logic line item by line item, with absolutely no defence or position.
So, what is a value-based pricing definition, then? Value-based pricing b2b is more than light and airy marketing surveys or jargon. It’s a way to empower your sales teams and your customers to have a meaningful and relevant discussion about the value of the commercial exchange (not just the invoice price).
Read about the best sales techniques in selling value effectively
The advantages of a value-based pricing vs cost based pricing
Consumer value-based pricing is critical and applicable to B2C businesses under margin pressure too. Why? Because consumers are humans. Humans don’t understand absolute value. Value needs to be explained in relative terms for us to understand it. Not shoved down throats using a cookie-cutter approach.
I find that B2C businesses that haven’t done a good job understanding what consumers value offer blanket promos and excessive discounts, hoping this will drive volume. Often it doesn’t. Because consumers don’t appreciate discounts on things, they weren’t going to buy anyway.
It’s your responsibility, as a leader, to help your teams educate your customers on the value they are receiving. This means clearly showing customers the trade-offs they’ll have to make if all they want is a rock bottom price – this is true for consumer value pricing and value-based pricing b2b.
Help your sales teams and customers understand the opportunity costs and risks of not using your products and services. Value-based pricing focuses on the gains they would get using your product versus the competitors.
Often, even saying this, puts executives off. It leads them to water down value-based pricing with their hunches, rules of thumb and assumptions about customers. Value-based pricing is an equal mix of customer psychology, economics, strategy, data analysis, promos and incentives, and mathematical modelling. Many choose to leave out the parts with which they don’t feel comfortable or competent (often the customer’s part). Doing this, however, will lead you straight back to the beginning. Unexplained value, angry customers, volume loss, revenue loss, tired and stressed out sales teams, segmentation models that don’t make sense or limited yield insights about customers – need I go on?
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To sum it up, I think what I’m saying is we need more of a balance in business. We need people in the business to count and protect our money for sure. In addition, we also need people in the business that can make money and find new growth opportunities. Yes, I know you have sales and finance teams already, but sales teams are busy selling and finance teams are P & L experts with a limited view on the market.
Your teams need help to drive profitable revenue growth. They need the support of a world-class pricing team to help them. A team dedicated to helping them make more profitable sales and deals. And you need a world-class pricing team on board. They help optimise prices across your products and customer segments. They drive consistent and safe EBIT gains in highly competitive and disrupted markets.
If you really want to improve your pricing in the best way possible, then, you need a diversity of thinking and people who know what they are doing when it comes to value discovery and strategic price-setting and strategy.
Improving pricing is a process, not an event. Not everyone who puts their hand up to do pricing can do it, often they are the worst option.
You now need to be careful about how you hire and select people to do this and how you resource your organisation to get your business through some tough times ahead.
Cost Based Pricing vs Value Based Pricing: Articulating Value, Not Price and Why It Is Vital
“At the end of the day, it comes down to price”. I heard this today from a marketing manager (not a pricing professional) in an electrical supplies company.
I told him to pack his bags (jokingly) as he had just admitted that his job was nonsensical. If it was just price all our adverts would be big billboards at $19.99 etc. written on them.
Cost based pricing vs Value based pricing – what is the service worth to the customer?
It is all about price – but only when the product and service on offer are exactly equivalent i.e. when a perfect commodity exists at a precise equal quantity and in a precise place and state. In that non- existent instance – the lowest price option would win the deal. Of course, even this super, simplified example ignores instances such as seller reputation, counter-party risk, payment terms, account management, service guarantees, money back offers etc.
Articulating the value (value pricing) begins by understanding this and actually explaining it to people both inside (sometimes more difficult) and outside your company.
We’ll try to compare value pricing comes to low-cost pricing strategy. How these different approaches can affect product pricing.
Low-Cost Pricing Strategy: Why Free Services Can Be A Bad Idea
Have you ever tried to teach or mentor someone and found them to be disinterested and not engaged in the process? This can be a very frustrating process for the teacher or mentor as their work becomes fruitless. It can also negatively impact on remuneration. For example, if your remuneration is performance-related, bonuses, etc. may be payable if your client is successful or passes some hurdle. Also, having a record of achieving positive success with clients is very important for futures sales. This can be the case in businesses from personal trainers to career coaches or of course, pricing consultants.
The US-based marketing expert Joe Polish has a saying ” if you do not pay, you do not pay attention” meaning that if there is no monetary exchange for value or information transferred, then people tend to undervalue it. I ask you to think back to when clients did not pay attention – were they paying you a sum that would be regarded as considerable or not pocket change?
Differences between Value and Low-cost pricing
Low-cost pricing can be established by larger competitors, with lower operating costs, to out-compete a small or new business on price alone. More established competitors could force you to take further price reductions that reduce your profits in trying to compete with your larger competitor’s low ball pricing to force you out of the market. Your pricing strategy can ultimately determine your business fate in a small business. By managing your pricing strategy, small business owners can extend business longevity and produce healthy profits.
With value-based pricing, a company considers the value of its product or service, as against to the cost the company made to create and produce it. To do this, the company determines how much money or value its product or service will generate for the customer. This value could originate from factors such as increased efficiency, happiness or stability.
Potential implications of a low-cost pricing strategy for consultants
This insight carries a number of important insights for anyone involved in consultancy or any pricing environment as regards low-cost pricing strategy decisions:
- Charging too low a price can attract too many customers. Evidence shows that even charging a nominal fee greatly reduces people using free services. For example, they put very little financial value on the service that they are unwilling to pay even for a nominal fee.
Note: in this context, arranging payment can be difficult and put people off also. Hence, Amazon invented the one-click shopping approach as a way to increase sales.
- Charging too low make people undervalue your product or service. This argument used in favour of some forms of vouchers to give people “free” schooling. Thus, they believe (particularly in the USA) that putting a monetary value on the schooling children and families receive will greatly increase their focus and attention. Interestingly, there is a counter-argument to this one in US University courses, despite huge fees, only 18% of students graduate within 4 years.
- You may attract the wrong kind of customer. As a consultant or advisor – if you provide advice for a low cost, you may attract customers who do not “invest” enough financially, to also invest mentally – i.e. you can bring a horse to the water but you cannot make it drink. As we have covered in our blogs on psychological pricing and luxury pricing strategy, sometimes a high relative price tag can make people place more value on the service being offered.
Comparing the value pricing and low-cost pricing strategy, both created to attract the costumers in buying their products.
The disadvantage of low-cost pricing undervalues your products. Whereas, value pricing focused on how much the customer values a product is a totally different customer-focused approach to pricing.
In short, low-cost strategy can attract the wrong kind of customers who wants free service or product. Whereas, value-based pricing, you can find customers willing to pay additional price premiums because they believe your product or service will fix an immediate need.
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In running a business, there is a huge difference between cheap and free. Hence, very few companies have built profitable or sustainable businesses with solid financial performance by always offering free services.
The low-cost pricing strategy is no longer viable and current with today’s market. More retailers should instead switch to value pricing.
More retailers are preferring the value pricing strategy as it accurately determines what the customers view as the product’s worth.
A Quick Guide to Cost Based Pricing vs Value Based Pricing
Here’s a quick guide to value-based pricing for teams embarking on a price rise, improvement or transformation project. Customer value-based pricing is considered to be the best pricing strategy for both B2B and B2C businesses, at least from a pricer’s point of view. Why?
The fact is, most businesses approach value-based pricing in a way which is not entirely right. This, in many ways, is a great opportunity for learning and development. In our view, the problem still comes down to a vague value-based pricing definition and surface-level understanding.
So, in this article, we will provide you with a quick guide to value-based pricing, including an overview of the problem, some insights, tips and a reading list on value-based pricing.
We strongly believe profitable pricing decisions are based on learning good habits but also unlearning bad habits too. So, let’s start now.
Why is it still so misunderstood? Here’s a quick guide to value-based pricing
We are now in 2020, and value-based pricing definition should by now be a well worn and understood concept to implement, but it is not. There are still a fair few staunch disbelievers out there dismissing value-based logic because they believe pricing should to be cost-based rather than value-based.
These ardent supporters of cost-plus are in both B2B and B2C markets and large and small businesses. What’s more, they strongly believe that using simplistic multipliers on aggregate costs is a more tangible and reliable way to set prices than understanding how customers perceive and value their products.
As a result of these latent assumptions and blindspots, cost-plus is still the dominant method of setting and positioning customer prices for new products and price reviews. Which in turn indicates that most organisational strategies and approaches are the opposite of a value-based pricing definition.
And to be honest, I don’t blame them. Pricing is both an art and a science and it can take a lot of time to master. Again, this is why you need an expert pricing team to help you – or at the very least, a quick guide to value-based pricing and reading list.
So here it is.
Related Podcast: What Is Value Based Pricing? 💰 Episode #0005
Did you know that there are books that just talk about pricing entirely? Books like:
1.Negotiating with Backbone: Eight Sales Strategies to Defend Your Price and Value by Reed K. Holden
2. Confessions of the Pricing Man: How Price Affects Everything by Hermann Simon.
3. The Ultimate Guide To Retail Pricing
4. How to Develop a Powerful Pricing Strategy for Your Business by Peter Hill.
5. Pricing: The Third Business Skill: Principles of Price Management by Ernst-Jan Bouter.
6. The Psychology of Price: How to Use Price to Increase Demand, Profit and Customer Satisfaction by Leigh Caldwell.
7. Brilliant Selling: What the Best Salespeople Know, Do and Say by Tom Bird and Jeremy Cassell.
8. Pricing Strategy: How to Price a Product by Bill McFarlane.
Reading the books (listed above) and this quick guide to value-based pricing will dispel some of the myths surrounding customer value-based pricing. What’s more, learning to understand customer value-based pricing with fresh, untinted lens will help to eliminate the myths of it being a dark art.
A quick guide to value-based pricing basics
Value-based pricing is about figuring out how your customers value your product portfolio – every single product and every single customer group and eventually a customer.
Do your customers understand the benefits of value-based pricing on your products and services?
How would potential customers value your portfolio if only they knew about you?
How much do you think they’d be willing to pay for the stuff you sell them if you knew what and how much they valued them?
Difficult questions I know, but the essence of value-based pricing.
So how do you go about determining a customer’s willingness to pay for your products when you don’t know how they value and perceive your business or portfolio? Simple answer: You can’t. You’ve got to find out and do the research. Ask the right questions and bring your assumptions and insights into a pricing framework which elicits essential criteria and list of customer’s value drivers. And from here, start to rank, sort and prioritise these unique value drivers on an ongoing basis and put economic values behind each.
These criteria may include:
1. Your ability to supply what customers want.
2. Network/convenience – i.e., not going too far to get it.
3. How they came about value-based pricing b2b in the first place.
4. What pressing problem is making them look for your products.
5. How easy it is to buy from you.
6. How well they understand their needs and relate the solution to your offer.
And finally, you also need to be realistic about how competent your teams are at pricing in this way. It takes a complete mindset change to do value-based pricing properly. Not everyone can do value-based pricing – the people that can are probably terrible at cost-plus pricing.
Value-based pricing requires people with a range of skills, capabilities and experiences – from maths, science, statistics, psychology, marketing and financial. They need to be logical but think laterally because essentially they are maximising margin and revenue by charging optimal prices for each customer based on the exact amount they are willing to pay for what they are receiving now. And it looks at the likelihood of customers paying more with additional marketing, better logistics and supply chain infrastructure, product innovation and better technology.
No, it’s not simple but this is why businesses are now hiring expert pricing teams to do the heavy lifting.
Discussion on a quick guide to cost based pricing vs value based pricing
Pricing is a vast and fast-evolving discipline. Cost-plus pricing is now a somewhat antiquated and risky approach to driving profitability. There are experts in this domain who have over 20 years of dedicated experience in the topic and are still learning new things every day.
Value-based pricing is a discipline in its own right now. Value is relative and deeply intertwined with the market. An expert pricing team knows this and is constantly learning and tracking the market to inform their pricing decisions and playbook. A set and forget attitude to pricing is risky and antiquated.
The market is always changing, and it is a perennial truth that customers will not always want or like the same stuff. But what is constant is the customer’s pursuit of benefits of value-based pricing when they buy. This does not mean value for money, which is occasionally the reason why we buy. Rather, buying something that solves a problem or meets a real need (financial, emotional, physical or psychological) – this is value, and this is what customers are willing to pay for.
Knowing this, your approach to pricing, value and learning should be adaptive and human too. Rest on your laurels with financial terms and cost-plus pricing knowledge based on what you learned 20 years ago, and face volume and revenue loss and eventually a profit downgrade.
- If you are not sure how to price properly, hire an expert pricing team that knows what they are doing.
- By prioritising the opinions of your customers, you are focusing on the people who will be making the buying decisions rather than just your own internal business needs and metrics.
- It takes time to find the right pricing strategy. You have to be dedicated to discovering your customers’ preferences before you set your prices.
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- Pricing is a business-critical marketing decision. It shows what the product is worth, what the business is worth, and especially what the customer is worth.
- Find out how much they are willing to pay for your product. What features they want to see you develop. By doing so, you will be able to not only give customers what they want. But you’ll also be able to attract and retain these customers as well.
- People are different and value things differently. For your business, the important thing is to ask your customers what they would have bought, if not your product or service. Their answers tell you who your toughest competitors are.
Cost Based Pricing vs Value Based Pricing: Separating Facts from Myths
With value-based pricing steps, we will dispel some of the myths surrounding value-based pricing. In an earlier article, we gave you a Quick Guide to Value-Based Pricing. Here are the top 5 myths about value-based pricing marketing. Followed by some tips and advice on what you can do to improve your approach to pricing.
» Myth 1: The price that creates the most sales is correct.
Well, that’s not quite right. You have to think about the 3, 6, 9-month impact of each pricing decision you make. You’ve also got to think about how discounts, promotions and price rises impact your price and brand positioning in the market.
The problem with only using a volume pricing strategy and cost-plus logic to set prices is that it drives your prices down, and keeps them low as consumers get used to taking discounts from you and seeing low prices in front of your products.
Pure volume plays are a risky price action in any market because there’s no guarantee that customers will buy more simply because it’s cheap. And what if your costs change? Answer: You’ll probably end up either overcharging customers or underselling yourself. A nightmare for customer price perception and your bottom-line profitability.
Best strategy on value-based pricing steps
So, what is the best strategy to create a maximised margin and revenue in a safe and sustainable way? The correct price will always be the price that is good for you and good for the customer as well. The profit dollars you earn as a result of value-based pricing will keep investing back in the growth of your business.
» Myth 2: Pricing is a financial decision.
Again, you’ve got to look at the bigger picture as value and pricing is more than just a financial modelling exercise.
When you’re calculating the best invoice prices for your items, you don’t want to hike up your prices too much because your spreadsheet says you’ll make more money doing this. No, listening to uncommercial financial models alone will drive your customers to the competitors and leave a sour taste in their mouths about you. But you still have to make money and shouldn’t be shy of this. Oftentimes, making money is the perfect excuse to back out of anything scary in life. But pricing decisions shouldn’t be scary or risky.
For example, if you want to sell high, sell high but know you can do this based on data and evidence. If you want to increase your prices later, do so by enlightening your customers on the value they once valued and have received without delay or fault. There is no shame in reminding your customers that you deserve to get paid for great products and services that they really value. Value is a two-way street.
A Marketing Decision
Pricing is, in fact, a marketing decision. The price you put on something, whether deliberate or not, sends a message to your customers about what the product is worth, what the business is worth, and especially what the customer is worth. The point of pricing is about capturing value and making stable profit margins; not just a short-term spike in sales or revenue.
Research your market for value-based pricing steps
» Myth 3: It’s okay to give random discounts if it gets more customers.
This is the kind of practice that can ruin a business.
Sometimes, a prospective client would come in and say, “Hey, I really want to buy from you, but your prices are too high so I will have to go to X your competitor unless you give me a substantial discount.”
To please the customer or get the sales over the line, many sales teams give in and offer large discounts. Then they say to themselves, “What’s the big deal? We got a new client and the client got a discount. Isn’t that win-win?”
Big mistake. These are the kind of customers that arm-wrestles you for a lower price and don’t make for good long-term clients. Interestingly, they are the people who complain most loudly about minor issues and they try to suck up most of your time by looking for special treatment.
And worst of all, they tell the entire community that you’re a pushover and you don’t really know what your business is worth. Encouraging everyone else to get a discount.
Part of the pricing decisions in value-based pricing steps
» Myth 4. Price erosion is an outside force that you can’t control. Wrong!
Price erosion only occurs when you are forced to lower your price—and thereby, the perceived value of your product—to compete with unauthorised sellers violating theirs and your pricing policy to gain market share quickly.
Price erosion is essentially the consistent loss of product pricing due to you and your competitors making a number of risky price actions over time. Playing the market like life is a zero-sum game doesn’t really work either. In fact, it’s a repeat purchase from valuable customers that really maximises margin.
Penetrating the market with low ball prices is a short term revenue play – and not sticky at all. Customers tend to move on to the next cheap offer. You become yesterday’s news and find yourself viewed as a commodity.
Tips on how to control price in value-based pricing steps
It is you who controls your prices. When you set them too low or don’t build enough value to justify them, you have nobody to blame but yourself.
Dominate your market. Offer the best products or services, compare cost vs value-based pricing, excel on client expectations, and build a customer base that loves to be a part of your ecosystem.
The goal here is not to make the market think your prices are “fair ”. But to make the market feel awkward for not paying you more since you’re already giving them such incredible value.
The only way to get the right prices for your offers is to understand what problems you are good at solving. Hence, becoming the go-to expert in your community for that.
- The correct price will always be one which is good for your business and good for the customer. Do not let speculations dictate your price.
- Giving random discounts will give the impression that you don’t know your market value and consumers. They will always expect a discount.
- Pricing is all about capturing value: It shows what the product is worth; what the business is worth; and especially what the client is worth.
- Remind your customers that you deserve to get paid for products and services that they really value. Hence, value is a two-way street.
- Listening to abstract and often uncommercial financial models alone will drive your customers to the competitors. Therefore, leaving bad feedback about you
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- Adhering to the myth that pricing is out of your control is essentially a load of crock. You control what your price should be with the help of the pricing team
- The advantages of value-based pricing will increase the profits and revenue of your business. In effect, following these myths will not bring you revenues.
- The goal to value-based pricing steps is not to make the market think your prices are “fair”. But to make the market feel awkward for not paying you more.
What Is Value-Based Pricing Strategy and How Can You Utilise It?
Despite the true definition of value being incredibly subjective, it remains a vital aspect for businesses to understand. Depending on your product offering, your business may need to use a value-based pricing strategy. Therefore, the way customers perceive value is key to unlocking your margins and driving revenue. In this article, we will be answering exactly what is value-based pricing strategy and how you can fully utilise it.
How To Take Advantage of Value-Based Pricing Strategy
Most customers are naturally driven by price and want to find the best price for what they are getting. Likewise, they will usually have a general idea of how much something should cost. This is called customer perception. Many businesses draw on this perception of what customers value in order to inform their pricing strategies.
Though customers know what they are after, they usually have a lack of understanding of what contributes to a product’s value. This provides businesses with ample opportunity to inform value through marketing and branding.
Without adjusting marketing strategies alongside price changes, increasing prices will not change the perceived value of the product. Rather, the customer’s willingness to buy a product is what changes. It’s important to understand these aspects, especially when shifting to a value-based pricing strategy.
What Is a Value-Based Pricing Strategy?
A value-based pricing strategy is essential when a business sets prices based on the perceived value of an offering. This is different from cost-plus pricing, which is based on the cost of production of the product.
Where cost-plus pricing usually benefits commodities, value-based pricing benefits companies with high competition and price sensitivity. Products usually have unique features that allow them to take advantage of a value-based pricing strategy.
Some brands that use value-based pricing include Apple and Starbucks. Other industries also include designer apparel, cosmetics, personal care, and even Software-as-a-Service or SaaS.
Value-based pricing has a lot of potential advantages when used properly. This includes the ability to price higher right when you launch a product. If you have marketed your product correctly, higher prices can drive hype and exclusivity around a product.
This pricing strategy also gives you a good feedback channel for what your customers are willing to pay. Knowing this can give your business invaluable insight into what needs to be improved and what demand is like. Having this data can enable you to discover the right profit-driving price point for your product.
Likewise, since value-based pricing is customer-centric, you have the ability to forecast solutions that your customers are looking for. This gives you additional perspective into what you should be developing next, allowing you to stay innovative and ahead of the game.
The downside to this pricing strategy is how it can be resource-intensive. You’ll need to invest a lot of time and labour to get it right, which is something that not all businesses can do. As we said in the beginning, value is subjective. This can make valuations imprecise or inaccurate.
Not all businesses will have the resources or time for trial and error. Researching your customer’s values isn’t a one-time endeavour. In fact, you’ll need to keep it up in order to continuously evolve and adapt to the current market. However, if done right, this model can prove incredibly profitable.
Creating A Customer Value Model
Once you have decided and gathered data, you can proceed by building a customer value model. Once you have put together a research team that spans the field of product engineering, marketing, and sales, you can begin to put your customer value model together.
Below are several key steps to achieve this:
The first crucial step, if you haven’t already done so, is to determine your target market. This will give your team and business a narrower scope to focus on, especially as you begin to conduct field assessments. Having a target market will also help you position your brand accurately.
After determining your target market, put together a list of value elements that will affect your costs and offers. This includes technical elements of your product, as well as economic and social factors. You should also consider aspects such as the lifespan of your product, usage, etc. Identifying these elements will help you accurately gauge what sets your product apart from the competition.
Once you have put together a list of relevant value elements, you can begin data gathering. You can start by creating field value assessments that can help you know more about your customers. These will help you decide on customer price perceptions as well as the monetary worth of the elements of your product. Surveys and focus groups are a great way to gain insight into your target market.
Using Your Data To Manage Your Value-Based Pricing Strategy
The data you collect from research and field assessments will inform your product pricing. However, it’s important to put your learnings to use beyond this.
Here are two additional ways you can utilise your data:
Managing Your Offerings
You will inevitably discover variations in your customer’s needs, which you can take advantage of. The insights can be used to develop lucrative supplementary services or new offerings in the future. By widening your product range through flexible market offerings and innovative solutions, you can attract new customers and maintain existing ones.
Remember that this can only be achieved through a deep understanding of how customers value each element. Likewise, you need a thorough knowledge of what it will cost to deliver these solutions. Remember that offerings that cost more to produce and deliver than they’re worth are sources of value drains.
Manage Customer Relationships
The core of a successful business is a good customer relationship. You can strengthen this further through your research in the same way that open lines of communication and feedback mechanisms do. Good relationships can also benefit your reputation and give your business more credibility.
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As we conclude, a value-based pricing strategy should be based on customer value drivers. They give you a better understanding of what matters to people, no matter how subjective it seems. There may be a lot of work involved, but the benefits you reap are far worth the effort. So, set up the necessary resources to implement it and work with a competent pricing team that can help you navigate pricing strategies.
Strandbags Uses Customer Value Pricing Strategy To Make Its Comeback 👜
Can a customer value pricing strategy save Strandbags from the digital disruption? Most retail businesses today are transitioning to the digital world to stay relevant. They consider digital marketing as the next trend in business. However, Strandbags disagree.
Strandbags is one of the largest in the travel luggage and fashion bag business. Founded in Australia in 1927, the retail store has become a hugely successful business, making it a household name across the country. But despite its successes, Strandbags had become acutely aware that its once successful brand strategy is now losing its relevance. It needs to reinvent itself and take it to a younger, global audience. To emphasise, it needs to do this without driving away its existing loyal customer base.
Fighting to hold on
It is currently surviving on a quagmire of discounts, percentages, numbers, stacks of product and ubiquitous discount messaging. This is diminishing the shopping experience and quality impression of its products. With that in mind, the true images of its brand, the genuinely good-quality products, the astonishing breadth, diversity and relevance are losing out to its competitors.
However, with the surge in global luxury retailers, many of them have been able to remain solvent due to the strong demand from Chinese tourists. But the situation is changing with many retailers. Just like Strandbags, they are losing out to online retailers who have good online product ads and pricing offers.
The retail market is changing rapidly. Online shopping is taking over from brick-and-mortar stores. Most especially the retail businesses that are facing insolvency. Retailers are being forced to reduce their physical presence and are cutting stocks to stifle costs and CAPEX. To counter this, a good online customer value pricing strategy is the key to survival for many traditional stores, all the while trying to transition their business to online platforms.
More Display Room
The present strategy of Strandbags is to commit more to its physical stores and to expand more display space. The recent shutting down of other retailers in Australia has actually been a blessing for Strandbags. The real estate leases have become more accessible for the company. In effect, they are able to acquire the store spaces they need. This is in line with the new store footprint strategy and will be able to roll out over the next three to five years. It is their belief it will give them the edge over the online retailers.
Strandbags’ goal is to buck the traditional retail trend in order to remain relevant to the next generation of consumers. With the luggage sector showing annual growth of 5%. They are ceding control of the shopping experience to the shoppers. They listened to their customers’ feedback. As a result, they found out that customers don’t like cluttered stores filled with stock and sale signs.
What customers really want is a clear brand story and value. So, instead of the typical cost-based pricing used in the past, Strandbags is now experimenting with a hybrid everyday customer value pricing strategy. This is a value-based strategy set up to attract their customers (old and new) to see their latest fashionable luggage and bags.
A customer value pricing strategy example includes a painting that is usually priced on its perceived value or when a book on a specialised field is priced high due to its market niche.
Much of the refreshed brand both visually and technologically is from the feedback they’ve received from their customers. The customers are savvy enough to know more about the brand by looking it up on the web. They researched it online even before entering the store. In effect, they are also visualising what they want, when they want it, and how they want it.
To become a digital mecca, the store features handheld checkouts for staff to help customers transact then and there – instead of putting them in a line. Video screens line the walls and showcase the brand to the customers wandering in, while the store itself fulfils e-commerce orders. Thus, this allows customers to interact with Strandbags as long as they please.
The Digital Challenge
The challenge now is for the brick-and-mortar stores to attract the time-poor, bargain-hungry customers to buy more in their store rather than buying from their online competitors. What’s more, they need to distinguish themselves from the online stores, showing off the superior quality and low price of their products.
Product quality and price is a blur to retail customers. No meaning or resonance.
Retailers now want to create a hands-on experience that cannot be recreated online, promoting original offers and services to customers that online retailers cannot provide.
Three customer value pricing strategy to entice customers back to stores
1. Loyalty Programs
This strategy has been around for a long time, but it was revived again due to digital disruption.
Big stores like Strandbags have loyalty program cards that can earn you credits when you go shopping with them, including other in-store benefits like complimentary gift wrapping or special events.
Loyalty programs are not only gaining popularity; they are also becoming more integrated with the supporting brand and shopping experience. It offers consumers a seamless experience across the point of sale, the Internet, phone and mobile channels.
This is a big challenge for retailers in boosting sales while also giving customers something different from the norm.
In perspective, Strandbags’ approach to loyalty is not too shabby. You get a 5-dollar voucher for every 50 dollars that you spend. The problem though is that this is over a half-annual period. I am pretty sure that you are unable to check your progress on their website. This could be an issue due to their specialty — bags, wallets and luggage. So unless you are trying to keep up with the Kardashians on the trendiest handbags and leather goods, you would be hard-pressed to earn sizable vouchers.
2. New Stores
The introduction of a ‘new look’ and bigger space has been well received by their customers. The change in-store layout has also indicated that people are still eager to shop at their stores, especially when it is something new to the region but established elsewhere.
Novelty is alluring to customers – both in terms of pricing and product – but price complexity and messy stores are not.
As these big name brands continue to expand, the influx of people often goes to other stores in the area. Once Strandbag stores get busier, other stores near them have a chance to get more business, boosting the industry as a whole. But whether or not other retailers are cashing in on this trend is still in question.
Currently, Strandbags has plans to expand — both their product range and in the geographical sense. The lightweight range of luggage bags is set to be released early next year to compete on different levels against other heritage brands.
Plans have also been made to set up shops in cities across Asia, starting in Singapore which would be the ideal entry point to the global market.
3. VIP Events
Whether it is a seasonal launch party, a special sale or an opportunity to debut a producer, VIP discounts and special events are growing in popularity with a range of retailers.
As a VIP customer, you’ll receive special e-news updates with special offers and style tips, thus, taking advantage of the benefits, even during Christmas and every day of the year.
For example, Westfield shopping centres regularly run events and competitions to engage with shoppers. Often working with retailers in promoting different activities. The response to these kinds of events is fairly positive, suggesting it is one of the ways for traditional retailers to get an edge over their online counterparts and giving customers a much more unique experience.
While many people associate online shopping with savings and convenience, traditional retailers can still provide a range of benefits for shoppers. Much of the success stories told by physical stores ties up with the strategies like the four above. Speculating that differences in shopping experience will lead to a balance between stores and screens.
- Using value-based pricing is a better alternative to cost-based pricing. It reminds customers about what they really value when they buy from you.
- People don’t just want stuff, they really want real shopping experiences, too. Even though they don’t realise it yet. It’s a constant reminder to live in the real world. Jerking them out of the lazy, online world they have become accustomed to.
- Strandbags is attracting new foreign buyers, especially the Chinese. It will give them the boost needed to sell their products online for future customers.
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- Strandbags is actively expanding its brick-and-mortar presence, using the possible launch of large-scale mega-stores down the line. This is supported by the fact many shoppers still prefer to shop in a physical store rather than going online, but only if the pricing and store experience is right.
- Much of the brands’ revamp – both visually and technologically is centred around giving control of the shopping experience to the customers.
- Strandbags is expanding globally. It should reconsider going online shopping in other territories like China where the habit of online shopping is prevalent.
Check Out This Humorous Cost Based Pricing vs Value Based Pricing Example!
Value based pricing example: Pricing is not exactly regarded as the funniest business sector – or one that lends itself very well to humorous anecdotes. However, I heard one the other day that I thought was pretty funny and really highlights a great value based pricing example in a real-world setting. One that can be applied to almost any industry – from tradesmen fixing a faulty appliance – to any B2B scenario.
Value Culture is a real revolution in helping companies improve their commercial capability and delivering sustainable margin improvements. We help companies plan and scope their future pricing strategy and capabilities and then enable the recruitment and pricing team building required to implement the strategy.
Value based pricing example – Tesla and Ford walk into a bar…
This anecdote has been told many times and has many people supposedly being the protagonists. A version is examined at the excellent website snopes.com:
“Nikola Tesla visited Henry Ford at his factory, which was having some kind of difficulty. Ford asked Tesla if he could help identify the problem area. Tesla walked up to a wall of boilerplate and made a small X in chalk on one of the plates. Ford was thrilled, and told him to send an invoice.”
“The bill arrived, for $10,000. Ford asked for a breakdown. Tesla sent another invoice, indicating a $1 charge for marking the wall with an X, and $9,999 for knowing where to put it.”
The article gives another real world example of this scenario:
“In the 1880s, James MacNeill Whistler, as plaintiff in a libel action, was challenged, “For two days’ labour, you ask two hundred guineas?” “No, I ask it for the experience of a lifetime.” That seems an apt summary of the message of this legend.”
The simple lesson here is the foolishness of following a classic “cost plus” or cost build up method of pricing.
I think it is a lovely simple anecdote and one that makes me smile!
See our blog here on making a business plan – and why pricing should, of course, be a core component!
Cost Based Pricing vs Customer Value Based Pricing: Profits Soar With Adaptive Pricing Team
A real-world example of Customer Value Pricing: Profits soar with an adaptive pricing team:
There are many obstacles and margin pressures challenging your business model and pricing capability right now. From commodity items through to high value-add medical technology devices.
- changing buyers
- changing customer preferences and value based buying
- maturing supply chain procurement
- a highly competitive industry
- pricing complexity
- a demand for pricing transparency
- a culture of discounting and lack of customer value pricing
- misalignment on pricing strategy
To explore the deep connections between business model adaption, customer value pricing and growth (individual, team and organisational), I will look at how business model constraints and challenges have changed the role of customer value pricing management in the Australian healthcare industry. I will then move on to discuss a real-world example of a successful healthcare company, Medtronic.
Medtronic is an example of a forward-thinking company that has transformed its business model to a value-based healthcare model. They did it at a time when the healthcare industry is facing many challenges. Even if you are not in the healthcare industry, you can draw a lot of lessons from Medtronic. Importantly, on their progressive response to an era of rising margin pressure in unchartered territories.
The new healthcare problem
Healthcare companies are moving towards new customer value pricing based business models that are focused on the outcomes for patients. They are also in the process of drastically changing their pricing approaches and reimbursement models. Because cost conscious health systems are making cutbacks and demanding value. For many years, healthcare companies have had it relatively easy. They got rewards for medicines, devices and therapies that produce weak benefits or only incremental improvements over existing treatments. However, now in an era of rising pressure on health budgets, the days of 50% margins without even a murmur or complaint from hospitals, health customers and systems is over.
Healthcare companies, like many other B2B businesses in Australia, are now in a rapid state of change to keep up and survive. Constraints on healthcare systems and reimbursement cuts, alongside pressure from the competition and procurement teams are forcing B2B healthcare businesses to rethink outmoded business models and outdated pricing models. In a race to maintain profitability, progressive businesses, like Medtronic, have addressed many of their business model and pricing challenges. They are now leading the way on how they do business and price to maximise revenue, margin and profit in an era of rising pressure and cuts to health budgets.
What Medtronic is doing through customer value pricing
When CEO, Omar Ishrak joined Medtronic in 2011 he immediately focused on transforming the business to a customer value pricing based healthcare model to become a formidable global healthcare provider of disease therapies. From 2011 till the present day, he invested in people and pricing. He invested in a dedicated customer value pricing function with several pricing directors and large teams of talented pricing managers and commercial professionals. He recruited teams of specialists with deep customer value pricing, reimbursement and health economics expertise and trusted his newly-formed teams to design and lead pricing and sales operations, decision making and requirements authority across a number of business units.
Over the past 4 years, Medtronic’s pricing teams have grown considerably. A consistent investment of time, money and resources into expertise, teams and expansion have enabled rapid growth. As a result of a series of business and pricing adaptions, Medtronic’s value proposition now represents a formidable “Integrated Healthcare Franchise”. Their new value-based business and pricing models have opened up large, new growth markets. Consequently, generating double-digit growth even in unstable and challenging times. They continue to grow and expand in new markets because their dedicated pricing and commercial teams are working closely and more effectively with physicians, hospital administrators and payers than ever before. Unlike a number of their competitors, they have the capability to validate the value that their business has generated from optimal long-term management of patients, including clinical and financial outcomes.
What’s the pay-off for changing old habits?
Despite pricing pressure from a number of areas (i.e., healthcare consolidation, increased competition, declining reimbursement rates and product problems, physician advisories, safety alerts), Medtronic continues to experience top-line growth (with revenues over $27B) and business expansion. In January 2015, they announced the acquisition of Covidien (representing 33% of the total business). Now they deliver a competitive value proposition boosting even greater hospital efficiency and an extensive product offering.
Medtronic is not the only business with an adaptive pricing function. There are also a number of other healthcare businesses in Australia making great headway with transforming their business and pricing at the same time. Other healthcare companies such as J&J, Baxter, Biogen, and MSD have all generated substantial EBIT returns (measured in the hundreds of millions) from investments in their pricing capability and people in the last decade.
What do successful businesses have in common?
Successful businesses stay ahead of the competition. The reason is because they recognise that pricing is inextricably connected to their customers and business landscape. None of them have managed pricing (and price adjustments) without thinking about their value and their customers’ perception of their value. And, every one of them has had a leader with a clear vision for growth.
Strong financial results are founded on congruence between an organisation’s business model and pricing capability. Leading companies like Medtronic, J&J and Merck periodically assess how these two factors are affecting strategy (i.e. their customers), structures (price architecture) and operations and teams in the business. A strategic pricing capability is not administrative. It is not about raising prices by 3% or offering discounts to customers to maintain sales volume. A price is the final output of a trusted and well thought through business model and value exchange with customers.
Strategic pricing is founded on a deep understanding of your business challenges and your customers’ wants, needs and financial constraints and objectives. It is also reliant on “Lean” and “Agile” methodology whereby prices are tested, trialled and rolled-out in sprints and bursts to maximise sustainable revenue, margin and profit growth for your business and your customers’ business in a safe and low-risk way. If you want to achieve strong financial results like Medtronic or other successful businesses, you have to think and behave like Medtronic. And overcome the natural tendency to price and do business in the same way you did 5 or even 10 years ago.
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If you truly want to know whether your business has the potential to be among the dominant players in your industry, look at your business and your teams objectively and answer honestly to the following questions:
Can your organisation’s business model compete with your competitors’ formidable new business models? Do you have the right pricing strategy in place to drive revenue, margin and profit growth in the short and long term? Does your team have the necessary skills, knowledge and experience to achieve its goals? Is a winner’s attitude prevalent in the business, driving the organisation to improve or transform old habits and beliefs?
Overcoming Strategic Overload with Pricing Strategy as a Value-Based Proposition 🏷
Some of the most common pressures that businesses will constantly face are evolving customer needs, global competition, rapid technology as they try to meet new goals and expectations. To align with these changes, some companies turn to pricing strategy as the first value-based step.
But why do some initiatives work for some companies while it doesn’t for others? Which strategic management steps would balance long hours of hard work and efforts to ensure long-term financial success and brand visibility?
In this article, you’re going to learn the differences between organisations that simply focus on monetisation from those that use the pricing strategy value-based as the core of their business model.
We discuss how you can raise the customer’s willingness to pay as well as the suppliers’ willingness to sell. We’re also going to show you how successful brands distinguish between value-added services from substitutes. What factors make other companies more successful than their competitors?
At Value Culture, we believe that pricing strategy value-based makes more impact on the sustainability of businesses. We argue that creating value shouldn’t just target the customers. It should also include employees and suppliers as those three resources are interdependent when highlighting your value proposition.
Pricing Strategy for your Customer: Value-based
In a recent study, ¼ of firms listed in S&P 500 gain an ROI that is much lower than their debt and equity (cost of capital). If these companies didn’t fail to look into value proposition opportunities, then their ROI would put them in a better position.
Value creation should focus on:
Value creation encourages the customers’ willingness to pay more for seemingly similar items, justifying the value and quality being offered to them.
What is “willingness to pay” in a customer value strategy?
Willingness to pay is the maximum amount or price range that customers will pay based on their individual motivations, desires, and value perception. It’s also often confused with pricing.
So, how can you distinguish between the two?
Some customers are quite price-sensitive that even pricing a product/service a cent higher will make a difference in their decision to buy.
For managers who focus on expansion and growth earnings are more motivated with questions like “How can I sell more?”
But a company that is driven by its value offerings, would centralise its efforts in gaining customer loyalty and trust. It engages customers in the company’s success journey – while constantly thinking of the customer’s best interests.
What do successful companies that focus on pricing strategy and are value-based have in common?
They always put more importance on value creation rather than just profits. They use this vision in many areas of their culture and organisational processes. Especially when it comes to their top 3 resources: employees, customers, and suppliers.
Likewise, they are aware that when they prioritise value perception first, income streams, as well as profit and margin opportunities, follow far more quickly in the long term.
How do you do this?
Take a look at opportunities to improve the quality of your product/service and its features. Look into your pricing structure, for instance. How can you shift to a price premium?
Apple, for example, charges a premium price for its devices that undergo remodels with new and improved features. It releases the latest versions of new gadget inventions annually. Like the upcoming virtual and augmented reality headsets and foldable iPhones.
Or take a fashion brand like Gucci. Its selling point is creating a feeling of exclusivity and social status for its customers.
So, if your strategies don’t motivate a willingness to pay or sell within the sales and marketing teams, then it means they’re ineffective. It means that more planning, research, and execution has to be done.
Below, we suggest some ways that management teams can deal with strategic initiatives:
Pricing as a Customer Value-based Strategy
Successful brands are capable of attracting the right target market. In other words, these are customers who really appreciate the ways that a company prioritises and creates value in its services/products.
1. An Australian health insurance company, for example, includes perks, discounts, and exclusive memberships in health facilities and gyms, spas, sports gear, and fresh markets or groceries.
Their pricing strategy value-based strikes at the core of their customers’ key value drivers – health. Thus, their brand perception and value grow over time, thanks to these value-driven efforts.
2. Likewise, an Australian car insurance company also put up more emergency vehicles in its lineup to cater to car accident cases. This allowed them to serve their customers better while minimising costs over fraud- helping them to raise their customers’ willingness to pay at the same time.
3. Take Tesla for instance. They offer car repair and maintenance at customers’ homes. What’s more, is customers set the time of day that is most convenient to them. So, they don’t have to go to an auto shop and wait in long lines until the work is finished.
In turn, they favoured this convenient option as one of their value drivers, while Tesla ultimately raises customers’ willingness to pay.
Value-added services increase customers’ willingness to pay
Successful companies and brands can easily recognise value-added services or products. In other words, these are extra offerings or premium options aside from the basic version of their services.
Some examples are appliances, cars, e-book websites, printers, gadgets, and the airline industry. Telecommunication companies are also known for using value-added services and bundles with streaming services.
1. For instance, a movie theatre in the U.S. was creative enough to include a nursery in its establishment. Parents could comfortably leave their kids attended by childcare professionals, while they enjoy their movie time.
Now, the theatre’s complementary services don’t seem to be directly related to the movie theatre’s core offering. But in thinking beyond basic theatre compliments like popcorn, soda, 3D glasses, comfortable seats, and ticket bundle sales, they successfully offer value.
2. Sony broke into the e-readers market ahead of Amazon. It had more advanced technology with minimal budget and took advantage of wireless access. But Amazon got ahead using its free 3G internet access in what we eventually now know as Kindle.
A pricing strategy that’s value-based should attract the right talent and company employees.
In most cases, employees stay in an environment where there is flexibility and engagement even if it was a little below the standard industry wages.
Although paying the right employees more when they deserve it can encourage employee loyalty. But remember, simply giving out high salaries doesn’t always mean that it creates value within the workforce.
Instead, varying up the jobs and offering flexible or creative workflow creates a value-based culture.
If customers have a “willingness to pay,” suppliers and employees also have what is known as “willingness to sell.” An employee’s willingness to sell in terms of compensation needs to be considered. Otherwise, you won’t appeal to the right pool of talent.
So, what are the factors that motivate an employee’s willingness to sell? And what are the common problems that they face?
1. For instance, clothing brand Gap found out years ago that its employees lacked structure in their schedules. The solution they found is to systemise daily work hours into a more predictable pattern.
Gap let Shift Messenger step in, which is an app for retail workers who need to swap shifts with other retail employees. It tested out the process for 10 months. And the result was productivity increased to 6.8%. Along with it was a major surge in sales of up to nearly $3 million.
As global competition and demand heighten, managers will often ask their employees to do more. So, how do they align their priorities and shift to a pricing strategy value-based action? They can simplify their strategies.
Often, looking after employee welfare helps staff perform better. And consequently, financial performance tugs along with employee performance success. They are able to attract the right talent who are loyal and satisfied. And they will often go the extra mile to achieve organisational goals, targets, company culture, and objectives.
Likewise, organisations that have optimised their training programs attract staff and applicants who put importance on learning and continuing education.
2. An Australian customer service chose to encourage an appealing work environment and employee benefits for its staff. As a result, employee satisfaction and productivity increased. Attrition and frequent absences also went down, ultimately lowering expenses on recruiting new talent and other damages. In turn, their customers’ willingness to pay also rose.
Pricing Strategy in the context of Value-based Suppliers
If most suppliers expect a minimum rate of compensation, how does a company offer value? One way to do this is to find solutions to minimise the supplier’s operations costs. You can offer further value by increasing productivity.
Bear in mind that as their costs are lowered, so does their minimum price range or “willingness to sell.”
1. Nike, for instance, introduced improved production methods in one of its factories in Southeast Asia. As a result, profits went up and were shared by its suppliers.
When organisations focus on value-based strategies, they are able to serve the right customers. On the flip side, companies that are more focused on short-term goals overlook why value-based strategies are important.
2. For instance, an internet portal in the 1990s passed up a $1.6mn opportunity to buy giant search engine Google back then. Why? Simply because they believed Google was “too good.” And they didn’t see any sense in diverting online visitors to other sites using customised and relevant search results.
Instead, they copied about 80% of their competitors’ performance and remained a follower in the market. As a result, they missed out on a huge opportunity to become part of today’s giant web company. Failing to set value-based priorities also made them skip on major long-term profit earnings.
Hitting Two Birds with One Stone: Value creation for both Suppliers and Customers
Companies that centralise their business model on value creation are also capable of satisfying their suppliers.
Take consumer electronics retailer Best Buy, for example. Years ago, Amazon was competing with Best Buy using aggressively low prices across its wide selection of items, focusing on high sales volumes.
To address the competitive threat, Best Buy’s CEO at the time introduced a new strategy by allowing suppliers to create their stores within Best Buy’s stores. This was a way to keep shoppers hooked with a wide variety of products they can select from. While increasing their willingness to pay.
Later on, Amazon and other giant brands like Sony, Samsung, and Apple invested millions in the stores-within-a-store model. This in turn lowered the overall costs of Best Buy’s suppliers and ultimately cut down shipping time – helping them to get ahead of Amazon and other competitors.
Nowadays, Best Buy’s website page functions as a virtual showroom where customers can browse first and weigh their best options before going to the store to make a purchase. Its online presence became more of a value-added customised experience of convenience.
As a result, their profits doubled and ROI rose to 23% because they planned well in uplifting customers’ willingness to pay and their supplier’s willingness to sell.
Complementary Services vs. Substitutes
Being able to identify substitutes from value-added offers is also key in the value proposition. Take how automated teller machines (ATM) were supposed to substitute bank tellers. Or how music streaming services replaced CDs and cassette tapes (but it wasn’t a substitute for live concerts.) Personal computers were also meant to replace papers. Yet all three have failed to completely remove people’s need for those services.
And then there’s profit pool. Apple has greatly demonstrated how a brand can maximise its profit pool. Through its iPhone, MacBook, and iTunes lineup, it ultimately raised its customers’ willingness to pay compared to its competitors. Likewise, Microsoft also shifted its income stream for its game console to its gaming apps.
The willingness to pay and willingness to sell may seem abstract at first. But using visualisation tools can help ease things as you start out. By focusing on the main value drivers of customers, you can simply create your own value map.
When the value proposition of two competing brands seem too similar, customers will differentiate and decide based on each brand’s pricing. And this is where pricing professionals or advisory firms step in to help you set up your product differentiation. They work with marketing, finance, and sales teams to justify the best value offer that they can give customers.
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Besides coming up with value-added services, companies need to be well-acquainted with every step of their customer’s journey. This helps them create more opportunities for their pricing as a customer value-based strategy.
Brands that are successful in creating value are tech-literate. They know how they can maximise emerging technologies and transform it into cross-functioning features within their services.
On the flip side, organisations that are centralised on monetisation are more risk-averse, defensive, and threatened by changing market trends. They fail to think ahead of the competition.
Some businesses also fail by playing catch-up. Meaning, they only start planning to adapt to the trends and market changes when it is already happening. Value-based leaders are able to forecast more accurately, using their resources and energy in the right areas.
Willingness to pay and willingness to sell are innovation platforms. They serve as an engine to maximise your value perception, helping your business stay in the industry and in the minds of customers.
If a company lacks research, analysis, and fail to create its value map or identify customer value drivers, it will not last long. Rather, it will remain threatened by competition and new ideas as it continues to ignore value-based opportunities for its customers, employees, and suppliers.
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Benefits Of Value Based Pricing For Pet Care Businesses Planning To Raise Prices 🐶
Did you know that 60% of pet care businesses aren’t operating efficiently? One of the primary reasons is that approximately 40% of veterinarians set prices based on the cost of offering a service, and roughly 80% also use this approach to price the products they sell. This approach makes it difficult to execute profitable price increases to sustain the business, particularly in light of the current high inflation. A better approach to improving a veterinary and pet care business plan is through value-based pricing. What are the benefits of value based pricing in pet care industry?
The problem is, though, many businesses struggle to recognise the value of their products and services, which is necessary to price according to how much customers are willing to pay. Consequently, they continue to use cost-plus pricing, believing that this is what keeps their customers. This is not true; it only limits the value propositions they can offer clients, preventing them from expanding into new markets. In effect, profit margin potential is being eroded even further. How can veterinary services start their transition?
In this article, we present the benefits of value-based pricing strategies for pet care services, particularly when raising prices. We argue that a cost-plus pricing approach is holding veterinary businesses back from realising their full potential. At Value Culture, we believe that value-based pricing is the right approach for pet care businesses, especially when it comes to raising prices. By the end, you will know how you can convince clients that they are receiving great value, leading to higher sales and maximum profitability.
Veterinary Business Plan To Effectively Increase Prices In Australia: Benefits Of Value Based Pricing
Many pet care and veterinary practices downplay the value of value-based pricing. Almost half of Australian veterinarians use cost-plus pricing for their services, and nearly all use the same pricing strategy for the products they sell. This is preventing them from maximising their profits, especially now that raising prices has become a necessity rather than an option for all types of businesses.
Everything is clearly becoming more expensive. Veterinarians are no longer able to provide the same service at the same costs. Yes, of course, you’re passionate about what you do. You want to help your customers as much as possible. However, if you don’t set up your business to make what you need, then you won’t be able to continue your operations.
Cost-plus pricing often leads to pricing chaos during economic difficulties. Businesses that rely on mark ups often struggle to remain profitable. Why? Cost-plus pricing with simplistic mark ups and/or margin targets often lead to over pricing or under selling products across large inventories. Costs are changing quickly and businesses often calculate costs at an aggregate level as opposed to site or product level. This in turn makes it difficult for business to offset and manage costs and prices – especially when pet care businesses often sell over 100,000 line items and have manty variations of the same item within a range. Within no time, not only are pet care business losing margin; they find that inflation eats away at hard earned profit margins.
Value-based pricing, on the other hand, is concerned quantifying the total $ value of an offer to customers over time based on measure like willingness of customers to pay and value driver analysis. You don’t want to offend your customers with a price increase, right? So, here are some tips on recreating your veterinary business plan with tried-and-true methods for raising your prices without losing customers through value-based pricing:
1. Recognise the value of your products/services.
Cost based pricing vs value based pricing: Cost-plus pricing fails to highlight the uniqueness of your offerings and will never help you maximise profits. A value-based pricing strategy, on the other hand, will help you raise your prices as efficiently as possible.
Furthermore, value-based pricing can assist you in selling your product or service in a manner that reflects your brand’s distinct style or expertise. This will cause your customers to favour your company over your competitors. As a result, you’ll be able to raise your prices accordingly.
Understanding what your customers need and value is the foundation of a value-based veterinary business plan. Determine which products/services your customers are willing to pay the most for. Then consider how you can outperform your competitors in these aspects.
Younger generations, for example, value businesses that provide value, authenticity, and quality. Besides that, they are the largest generation of pet owners. They will almost certainly continue to support your company after price increases because they know they are getting what they pay for.
Enhancing your customer experience and investing in your product innovation will help you attract new customers and retain existing ones.
2. Set your new target profit margins for your pet care and veterinary business plan.
You must understand how you generate your margins in order to set your new target margin, assess whether it is feasible, and determine how to achieve it.
To begin, specify your variable costs, which include the value of your time spent developing products or providing services. Second, look into your current profit margin. This is the difference between your variable costs and the selling price of your product or service. Lastly, consider your fixed costs. These are the expenses that you simply cannot avoid, such as insurance and space rent.
Each month, you can calculate your gross profit margin, which refers to the amount of money left over after deducting all costs from your sales. It may be necessary to make some changes as you establish your final price, but once you fully comprehend your margins, you will be able to figure out the best way to raise your prices.
Should it, for example, be done in stages or all at once? What will give you the most financial advantage in the short and long term?
3. Communicate the benefits of your value-based pricing increase with your customers strategically.
You can leverage your existing customer loyalty. Your satisfied customers will not abandon you if you raise your prices. They initially chose you because they like you. Finding a new business that is similar to yours in order to save a few dollars is not worth the time and effort. Of course, some will leave. But how do you keep customers who are happy with your services?
One of the most challenging aspects of raising prices is informing customers. The truth is that no matter how good your products/services are if you don’t communicate them effectively with your customers, your price increase will be ineffective. You will continue to lose more and more customers.
Consequently, refrain from hiding your price increases from your customers. They deserve a heads-up before setting your new prices. Explain why you’re raising your prices as clearly as possible. This is where you should put your knowledge of your customers’ value drivers to good use. Here are a few topics you can discuss when notifying them of your price increase:
- Creation of a better environment and service delivery for your customers and their pets
- Introduction of higher-quality product lines
- Continual delivery of the best products/services in the face of supplier price increases
Whatever your reasoning, don’t hesitate to share the details with your customers. They’ll want to know what they’re paying for and why, and we’re confident that the majority of them will understand.
Discussion On Why A Veterinary Pet Care Business Benefits From Value Based Pricing
Australia has one of the highest rates of pet ownership in the world. Despite being affected by drought, wildfires, and a lingering global pandemic, many Australians continue to care for and love their pets. This is demonstrated by the fact that 61% of Australian households have pets. Most importantly, analysts estimate that the country’s pet care industry is worth around $13 billion.
In contrast, the majority of pet care and veterinary practices lack the necessary capabilities to maximise their profit margins. Many are hesitant to deviate from cost-plus methods because they don’t know how to strategically position their services and products. Others are rejecting the implementation of price increases because they’re afraid, they will lose customers.
All of these inefficiencies can only harm the pet care industry. They must emphasise value and raise their prices sooner rather than later. Why are we saying this? Many businesses have thrived in recent decades, but they are now threatened by inflation.
In the last few years, the price of pet supplies has already tripled. Businesses that do not raise their prices risk going bankrupt. Thanks to value-based pricing models, this does not always have to be the case. There are even more innovative ways to ensure that the benefits of value-based pricing are maximised.
Reaping The Benefits Of Value Based Pricing In Veterinary And Pet Care Businesses
Pricing conversations with customers can be complicated, so having a communication strategy in place is essential. Efforts to improve your value-based pricing implementation across your products and services can help build a more fruitful and flourishing pet care and veterinary business plan. To realise these benefits, here are tips on how pet care businesses can successfully make value-based pricing profitable:
1. Keep giving your customers adequate price notices.
It is vital to give your customers time to process the information between declaring and implementing price increases.
For example, if you regularly email your customers or post on social media, simply discuss your price increase notification in your next batch of bills or advertising material. Another way is to display signs in your store. You can even tell customers personally when they come in for their appointments if you are confident doing so.
The primary objective is not to infuriate customers with a large price increase. A large jump can be jarring and is unlikely to go down well with customers. If possible, consider gradual but regular price increases. This will allow them to become accustomed to your new pricing and understand why you are doing so.
2. Organise discount promotions.
People are naturally attracted to bargains. Create occasional discount promotions to entice new customers and keep existing ones happy. Many Australians are currently conscious about their spending their pennies. They will feel incentivised by discounts.
Further, contemplate offering some of your services or products in packages. In doing so, you could indeed add a little more value for customers who need more of your service or want to try something new. Just remember that you have to keep your discounts at a minimal level to actually improve your profitability.
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Whether you’re a pet caretaker, owner of a dog daycare, or run a pet grooming enterprise, you should never be afraid to charge what you’re worth. As your prices rise, devote more time and effort to developing loyalty programmes and price promotions within your pet care and veterinary business plan. These additions will be critical in securing the value of your price increases. You can train your team to specialise in value-based pricing.
Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year. As they identify more complex and previously unrealised opportunities, efficiencies, and risks.
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