Value Based Pricing – A Customer-Focused Method

The customer-focused business model has evolved alongside societal and technological changes, and it continues to grow as businesses adapt to changing customer expectations and behaviors. Today, customer-centricity is considered a fundamental aspect of successful business strategies across industries.

The customer-focused business model has evolved over time, but its roots can be traced back to the early 20th century with the rise of the Industrial Revolution and the subsequent shift from production-oriented to customer-oriented approaches. Here are a few notable milestones in the development of customer-focused business models:

1. Early 20th Century: In the early 1900s, marketing concepts began to emerge, challenging the prevailing production-centric mindset. Pioneers like Philip Kotler and Theodore Levitt emphasized the importance of understanding and meeting customer needs as a core business objective.
2. The 1950s-1960s: During this period, businesses started recognizing that customers have different needs, preferences, and buying behaviors. Market segmentation gained prominence as companies began tailoring their products, marketing messages, and strategies to specific customer segments.
3. The 1980s-1990s: The 1980s and 1990s witnessed a shift towards relationship marketing, focusing on building long-term relationships with customers. This approach emphasized customer retention, loyalty programs, personalized communication, and delivering exceptional customer service.
4. The late 1990s-2000s: With the rise of the internet and digital technology, businesses began to leverage data-driven insights to better understand customer behavior and preferences. The focus shifted towards delivering seamless customer experiences across various touchpoints and channels.
5. 2010s-present: In recent years, there has been a growing emphasis on customer-centricity as a business philosophy. Companies invest in customer experience management, utilizing technologies, data analytics, and personalized approaches to deliver exceptional experiences and build strong customer relationships.

Not only enterprise companies but small family-owned businesses aim to tailor their business strategies and processes to a customer as a core. Meaning no matter the size or industry you belong to, you can only acknowledge customers’ feedback, if nothing else, to improve your business. But for the best results, it is not just as easy. Let’s dive into what you can do.

There is a variety of pricing strategies that can potentially work for you. Did you know that there is a pricing strategy evolving around customers solely? This might be your go-to pricing strategy and an ideal way to centralize your business around customers.

What is value based pricing?

Value based pricing is a pricing strategy that focuses on setting the price of a product or service based on the perceived value it provides to the customer. Instead of solely considering production costs or competitor prices, value based pricing takes into account the benefits and outcomes that customers expect to receive from the product or service.

The goal of value based pricing strategy is to capture a portion of the value that the customer receives and is willing to pay for. This approach acknowledges that customers are often willing to pay more for a product or service that offers higher quality, unique features, superior performance, or solves a specific problem for them.

To implement this pricing strategy, companies need to understand their target customers, their preferences, and the unique value propositions of their offerings. Market research, customer surveys, and in-depth analysis of customer needs and behaviors can help in determining value perception. By aligning the price with the value delivered, companies can potentially increase their profitability and competitive advantage.

Value based pricing implementation for eCommerce businesses – step by step

• Understand customer needs and preferences: Conduct market research, analyze customer behavior, and collect feedback to gain a deep understanding of your target customers. Identify their pain points, desires, and the value they seek from your products or services.
• Define unique value propositions: Determine the unique features, benefits, or solutions that set your products or services apart from the competition. This could include factors like quality, convenience, customization, personalization, or exceptional customer service.
• Segment your market: Divide your customer base into segments based on their needs, preferences, and willingness to pay. Each segment may perceive value differently, so it’s important to tailor your pricing strategies accordingly.
• Determine the value perception: Assess the perceived value of your offerings within each customer segment. This can be done through market research, surveys, or customer interviews. Understand how much value customers associate with different features, benefits, or outcomes provided by your products or services.
• Set prices based on value: Price your products or services based on the value they deliver to each customer segment. Consider the customer’s willingness to pay, the intensity of their need, and the alternatives available in the market. Align the price with the perceived value, ensuring that customers feel they are receiving a fair deal.
• Communicate the value: Communicate the value proposition and benefits to customers through your eCommerce website, product descriptions, marketing campaigns, and customer support channels. Highlight the unique features and how they address customer needs effectively.
• Monitor and adapt: Continuously monitor the market, customer feedback, and competitive landscape. Track customer satisfaction, sales performance, and profitability. Adjust your pricing strategy accordingly to ensure that it remains aligned with the perceived value and market dynamics.

Remember that implementing value based pricing in eCommerce requires ongoing analysis and adaptation. Regularly assess the competitors, market, and customer needs to refine your pricing strategy and maximize the value delivered to customers while driving business growth.

Value Based Pricing vs Cost Based Pricing

Let’s consider two companies in the smartphone industry: Company A and Company B. Both companies offer similar smartphones with comparable features and specifications. However, Company A implements a value based pricing strategy while Company B follows a cost based pricing approach.

Company A conducts market research and identifies the unique value propositions of its smartphones, such as exceptional camera quality, intuitive user interface, and long-lasting battery life. Based on customer feedback and willingness to pay, Company A sets its prices slightly higher than its competitors, reflecting the perceived value of its products. Company A invests in marketing and communication efforts to highlight the value and benefits of its smartphones, emphasizing the superior user experience and innovative features.

Customers perceive the higher price as justified due to the added value and are willing to pay a premium for the enhanced experience.

As a result, Company A experiences higher customer satisfaction, brand loyalty, and increased profitability. It may also gain a competitive edge over Company B due to the perceived higher value of its products.

Company B adopts a cost based pricing strategy, focusing on covering its production costs, overheads, and desired profit margin. Its pricing strategy does not consider the unique value propositions or the perceived value of its smartphones. As a result, Company B sets its prices at a lower level compared to Company A, aiming to compete on price.

However, without emphasizing the value provided by its products, Company B fails to differentiate itself from competitors effectively. Customers may perceive Company B’s products as lacking unique features or superior performance, leading to lower perceived value and a reduced willingness to pay. Consequently, Company B may struggle with lower customer satisfaction, weaker brand loyalty, and potentially lower profitability compared to Company A.

In this hypothetical scenario, Company A’s implementation of a value based pricing strategy helps it gain a competitive advantage over Company B. By aligning the price with the perceived value and effectively communicating the unique benefits of its smartphones, Company A attracts more customers, generating higher revenue, and enjoys greater success in the market.

Examples of value based pricing strategy

Apple is known for its value based pricing strategy across its product range. The company positions its products as premium, high-quality, and innovative. Apple prices its iPhones, MacBooks, and other devices at a premium compared to competitors, leveraging the perceived value of its sleek design, user-friendly interface, and ecosystem integration.

Tesla, the electric car manufacturer, adopts value-based pricing by emphasizing the unique benefits of its vehicles. Tesla positions its cars as environmentally friendly, technologically advanced, and providing superior performance compared to traditional combustion-engine vehicles. Despite their higher price tags, Tesla vehicles are priced based on the value they deliver, including features like long-range capabilities, autopilot functionalities, and over-the-air updates.

Starbucks implements value-based pricing by focusing on the overall customer experience and the perception of quality. The company charges premium prices for its coffee beverages, positioning itself as a provider of high-quality, ethically sourced coffee. Starbucks creates a welcoming ambiance, offers customization options, and provides exceptional customer service, reinforcing the value proposition that justifies the higher prices.

Adobe offers its Creative Cloud suite of software through a subscription-based model. The pricing structure is based on value, catering to different customer segments such as graphic designers, photographers, and video editors. Each segment has access to a tailored set of tools, allowing customers to pay for the specific software they need, resulting in a flexible and value-driven pricing approach.

Amazon Prime is a subscription service that offers benefits like fast and free shipping, access to streaming services, exclusive deals, and more. Amazon prices its Prime membership based on the value it delivers, such as convenience, cost savings on shipping, and access to additional services. The perceived value of the bundled benefits justifies the annual subscription fee.

Pros & Cons of Value Based Pricing Strategy

Pros:

• allows companies to capture a portion of the value perceived by customers, potentially leading to higher profit margins. By aligning the price with the perceived value, companies can avoid pricing their products or services below their worth.
• puts the customer at the center of the pricing strategy. It focuses on understanding customer needs, preferences, and the value they seek, allowing companies to tailor their offerings and pricing to meet those needs effectively.
• by differentiating products or services based on unique value propositions, companies can gain a competitive edge. Value based pricing positions the offerings as superior or distinctive, allowing companies to justify higher prices and stand out in the market.
• when the price aligns with the perceived value, customers are more likely to perceive the offering as worthwhile and of higher quality. This can lead to increased customer satisfaction, loyalty, and positive word-of-mouth, benefiting the company’s reputation.

Cons:

• requires a deep understanding of customer perceptions, market dynamics, and the unique value propositions of the offerings. This can be a complex and time-consuming process that requires comprehensive market research and analysis.
• perceived value can vary among customers and may change over time. Determining the appropriate price based on value can be subjective, and companies may need to adjust their pricing strategies regularly to stay aligned with changing customer perceptions.
• value based pricing may not work well in price-sensitive markets where customers prioritize low prices over perceived value. In such cases, customers may choose cheaper alternatives, even if the perceived value of a higher-priced offering is higher.
• setting prices solely based on value can carry the risk of overpricing or underpricing. Overpricing can result in reduced demand, while underpricing may leave money on the table and impact profitability. Striking the right balance is crucial.

Overall, value based pricing significantly benefits profitability, customer focus, and differentiation. However, there are common misconceptions about his pricing strategy. Be aware that it requires careful analysis, understanding of customer perceptions, and continuous monitoring to ensure that the price accurately reflects the perceived value and remains competitive in the market.

Value based pricing aims to create a win-win situation for both the customer and the company by ensuring that the price reflects the value delivered, leading to customer satisfaction, loyalty, and improved profitability.