Doing the most valuable things makes our outcomes valued more. This is the key ingredient of success when it comes to product pricing as well.
Lets take a brief walk, through how to approach value based pricing.
The key in deciding a product’s price lies in either ‘perception’ OR ‘reality’ of how valuable the end user considers the product to be.
A bottom up approach is the most useful starting point to make a pricing decision of a product.
When we produce a product for a market, how can we be sure if the market will consider it affordable?
If we do cost based modelling which is in general more inside out approach, how can we gen into the shoes of end-consumer?
While cost model is important to understand how much we had already spent on creating the value out of our product , value model will let us understand if end user can afford this cost or can he spend more for if we’d add some more features/ additions? etc
Value pricing can be best understood from the comparison of Apple & Android.
I believe both these platforms follow value pricing. Lets see why!
An Apple user considers high quality, well designed handset and UI/UX as valuable.
An Android user considers a smart phone with acceptable quality as valuable. To accept this as value, this user is okay to forego some benefits that are enjoyable on other platforms.
The prices of these products reflects these specific features.
Value pricing gives us ways to understand and create segments of the consumer base we are dealing with.
Its near impossible to sell an Apple product to a person who does not see value in their high quality and best user experience. Hence, it is wise to approach value pricing model before one embarks on the product market fit.
If we understand that we are trying to deal with end consumers who are willing to afford only acceptable quality, it is easier to decide how much it should influence your cost model or amount of money we should be spending on creating value.
The greatest pitfall in value based pricing however is that the product leaders can overestimate or underestimate the value. This sometimes leads product to be placed either much above or much below the affordability of many segments of the market. This will lead to poor market reception.
Value pricing strategy:
A few steps towards achieving value pricing are as follows:
[Step 1] Absence study: In the absence of your product what do you expect your customers to buy/use/spend money on?
[Step 2] Cost to customer: Study the costs that incur to end user to get the job-done or hire a product of that specific job?
[Step 3] Alternatives: Find the list of all alternatives that are at end user’s disposal to get their specific job done. In this step, one need to be critical about finding segmentation of end users. Some are willing to pay less for less value. Some are willing to pay high for high value. Some are willing to pay only for high quality products.
[Step 4] Define the targets: In this step, based on the market research, one can simply find the only segment of the market you want to serve. Or, fix the primary market you want to serve
[Step 5] Survey or interviews: This is a key step to understand the subjective aspect of the value. This is also help us reveal the perceived value in the end user’s view.
[Step 6] Cost modelling: To be able to serve the market targeted, what we need to spend is the outcome of the cost model. This should help us to determine how profitable the product will be.
[Step 7] Pricing: This step involves many sub steps ranging from subjective cost plus model→ Simulations for Demand curves → Final pricing model. This step involves fair amount of math and economics. Involve data scientists, economics majors and finance specialists to work for this step success.
To achieve sustainable competitive advantage, value pricing plays a key role. Unless we are talking about a product in red ocean market and industry where there is a poor innovation scope, small pocket segments etc, value pricing is the KEY for building successful ‘sustainable competitive advantage’