How to Set Up Pricing that Wins Customer and Delivers Value


So you’ve built your business, and now you are wondering how much you should be charging for your products or services. You want to set up your pricing in a way that is fair for you and for your customer.

Put yourself in the customer’s shoes, would you buy a product that you feel is overpriced when compared to the value that it delivers?

No because you are a smart shopper, but so is your customer base. They are less likely to purchase a product that they feel is priced at more than its worth, but that perceived worth is dependent on the product and the target market. For example, all watches tell time, yet some people are willing to pay $5-$10 for their watch, while others are willing to pay $180,000 per watch.

It all depends on what the customer perceives the value of the item to be, so the key to pricing is a concept known as value-based pricing.

Value-based Pricing

Investopedia provides three takeaways from this concept, these are:

  • Value-based pricing is a strategy of setting prices primarily based on a consumer’s perceived value of the product or service in question.
  • Value pricing is customer-focused pricing, meaning companies base their pricing on how much the customer believes a product is worth.
  • Companies that offer unique or highly valuable products and features are better positioned to take advantage of the value pricing model than companies which chiefly sell commoditized items.

So you pricing strategy should be exactly that! It should be customer focused and valuable. The more your product is branded as valuable, the more leverage you have on the pricing.

How-To

Theoretically that sounds wonderful, but let’s take a look at how you can get this done.

  1. Customer Insight. Research your market, understand who your customers is, and study their behaviors. You can do that though customer personas which help you define the key characteristics that set your customer apart. The more you understand your customer, the better you will be at determining the value they are willing to pay for your product or service.
  2. Value. How valuable is your product? What sets you apart from your competitors? The more you understand your product and the value it brings, the more you can leverage the pricing. This is because understanding your product enhances your communication. You can easily highlight the features that set it apart from its competitors. So when the customer asks “why should I pay more for your product?” Your answer will verify your claim that your product is better.
  3. Co-create Value. Prahalad and Ramaswamy, professors of Business Administration at the University of Michigan, explain that co-creation is “the joint creation of value by the company and the customer; allowing the customer to co-construct the service experience to suit their context.” This means that you don’t use the “one-size fits all” mentality. You customize; you create value that engages the customer and allows them to personalize their experience with your product or service.

To illustrate this point, Prahalad and Ramaswamy use the example of doctor patient interactions. Today, because of websites like WebMD, patients are more informed than ever, so upon entering the clinic, they expect transparency from their doctors. They also expect that doctors do not give them a general treatment, but something that is customized and personalized for them. The researchers emphasize that “What we need to create is an experience environment within which individual patients (consumers) can create their own unique personalized experience. Thus, products can be commoditized but co-creation experiences cannot be.”

Through customer insight, value, and co-created value you can place your product on the more competitive side of the market. They help increase how much the customer is willing to pay for your product or service. As Prahalad and Ramaswamy mentioned above, “products can be commoditized but co-creation experiences cannot”. The overall customer experience can have a tremendous impact on your sales and on your product pricing and that begins with understanding your customer and their needs.

Last thing to consider is the way you communicate to your customers. You may have understood your customer and created a high value product and even refined your co-creation process, but if the customers are not aware of these benefits then it will be difficult to have them pay the higher price for the product or service. So, what and how you communicate with your customer can impact your pricing model as well.

I hope you enjoyed this article; if you did, please don’t forget to share and subscribe for more.

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