One of the most important aspects of your business is pricing. It directly impacts your profits and, by extension, your budget. So, it’s not surprising companies invest so much into finding and implementing the best possible pricing strategy for their line of work and long-term goals.
One of the most popular pricing strategies lately has been value pricing. However, its popularity also brought about a lot of confusion regarding the concept, how it works, and its main principles.
This article will unveil the mysteries attached to value pricing, explore its benefits, and discuss how you can incorporate it into your business. Keep reading.
Value pricing is a customer-focused pricing strategy that bases its price evaluation on the perceived value of products or services. Namely, the company selling the products or services sets their prices depending on how much the customers interested in purchasing them believe those products or services are worth.
As such, this strategy directly contradicts the slightly better known cost-plus method that bases its price ceiling and price floor on the goods’ production costs.
Companies that sell products or services that enhance self-esteem or provide unique experiences commonly use value pricing strategies. The reason for this choice lies in the customers’ natural inclination to assign a perceived value to them.
The fashion industry is a typical example of a market that relies on a value-based pricing strategy. Popular brands use their customers’ perceptions of how the brand name affects their image to decide the prices of their products. Simultaneously, they set a standard for the rest of the market to follow.
Unlike cost-based pricing, you cannot use the value pricing method to determine an exact price that will match how customers feel about a particular product or service. So, this method focuses on your product or service’s features and qualities that set it apart from the rest of similar products or services on the market. For the sake of better understanding, we’ll use an example.
Let’s say you wanted to sell a mobile phone. As you probably know, the market you’re entering is oversaturated, and the customers are spoiled for choice. So, if you’re planning to use the value-based pricing strategy successfully, you’ll have to go through a couple of steps:
A value pricing strategy can positively influence the following areas of your business:
Adopting the value-based pricing strategy is not an easy process. Several psychological pricing techniques can help you make the most of this method and maximize your profits. We’ve singled out the most useful one and explained it below.
Tier pricing is a pricing model whereby companies sell products or services by offering a choice between several options at different price ranges to their customers.
To fully understand tier pricing and its significance, you must be familiar with the psychology of consumption that lies at its foundation. The principles of the psychology of consumption we’re referring to are related to a 2011 psychology experiment conducted by Dr. Paul Rodway.
Dr. Rodway presented subjects with a lineup of 17 pictures and asked them to choose the ones they preferred. The subjects differed in their appearance, age, gender and artwork preferences. Nevertheless, they kept choosing the pictures in the middle of the lineup.
For confirmation, Dr. Rodney repeated the experiment using identical socks instead of pictures. He got the same results — the participants chose the socks in the middle once more for no apparent reason. So, Dr. Rodway concluded that we tend to choose the middle option when presented with several choices next to one another. This phenomenon became known as the centre stage effect.
The key to this behavioural pattern is that we tend to pick the middle option regardless of its proportional difference compared to its upper and lower alternatives. So, you can use this psychological bias in combination with the tier pricing model to gain an advantage over your competition.
Set the product you’re trying to sell as the middle option in a tier. This product should draw more attention and sell the most regardless of how much the other two products/services cost.
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This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA advisor.
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