Value pricing is a pricing strategy that takes the value your service provides to your customer and sets an appropriate price that demonstrates more value than your service costs. It can be used as a tool for increasing revenue, improving profit margins or simply providing customers with the best quality product for their needs.
Let’s work through a practical example that many small businesses face so we can better understand how value pricing works: deciding on which website designer to use.
Designer A is offering to build you a website for $1,500 including 5 pages and any additional pages will cost you $500 each.
Designer B is offering to build you a “marketing machine” that they expect will deliver you 5-10 leads per month and they are asking for an investment of $1,000 per month for a minimum of 24 months.
These are two very different ways to pitch services and one obviously commands a far high price. Designer A has tied their price to the cost of producing the work (ie the number of pages needing to be designed). On the other hand Designer B has tied their price to the value of the service being provided (ie the number of new customers you acquire from your new website) and as a result, could demand a far higher price for their services.
The first step to value pricing is to understand your target customer’s goals.
What do they want to achieve? Do they want more customers and revenue? Or do they want to provide a better experience to their existing customers? Whatever the goal, you need to understand what they are trying to achieve. It might sound obvious but the easiest way to understand someone’s goals is by simply asking them, for example, you could ask them where do you want to be in 5 years?
Having a 5-page website doesn’t achieve a goal, but having a website that delivers 5-10 new leads every month could help your customer achieve a revenue target they have. Both designers might produce a website that achieves this but Designer B is making it clear that their service will help achieve a goal.
Once you know their goals, you need to understand what not achieving these goals costs them.
How much money does it cost them to acquire new customers? Have they been losing customers to the competition? How many new customers would it take to make up for the lost revenue and how long before that happens? And what is their customer’s experience like right now?
If it currently costs $300 to acquire a customer lead, then Designer B is effectively asking their customer to pay $100-$200 per lead which makes a lot of sense. However if the cost of acquisition is $50 per lead, then Designer B’s offer looks like poor value for money, which leads us to the last element of value pricing.
Striking the right balance between solving a problem and charging an appropriate price is critical.
Your customer should feel like they are getting a great deal and that that the price is justified by the value of the problem you are solving for them. If you charge too little, you can actually make your customer feel like they are not getting their money’s worth and if you charge too much then your customer is left with a sense that they are just one of many customers the business is looking to extract as much revenue from.
When defining your price think about what goals your customer is trying to achieve, what is not achieving those goals costing them and what is a fair price that leaves them feeling like they are getting a great deal and solves their problems.
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