Using Value Pricing to Maximize Revenue and Profits 0

Posted On May 12, 2022, by Admin

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.


What Is Value Pricing?

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.


Where Is Value Pricing Strategy Commonly Used?

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.


How Does Value Pricing Work?

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:

  1. Identify your customers— Value-based pricing always uses a specific demographic to help you determine the price of your product more accurately. So, instead of focusing on all mobile phone buyers, you’d focus only on smartphone buyers, for example.
  2. Analyze the market— This strategy also requires extensive knowledge of the items your product will compete with. Discover what features and qualities your product has that differentiate it from the alternatives on the market and learn which characteristics and qualities customers value the most. In the case of our example, you might look at how important a large display or unique camera features are to the customers you’re targeting.
  3. Determine the price—- Use the data you’ve collected with the focus on the features that differentiate your product from others on the market to determine its price. Ask yourself if customers are willing to pay more for a slightly bigger screen or a better camera resolution?


Benefits of Value-Based Pricing

A value pricing strategy can positively influence the following areas of your business:

  • Market share acquisition— If your target market isn’t brand-biased, you’ll find reaching it much easier with this pricing strategy compared to any other. This holds true even more so if your product or service has a feature or quality that notably differentiates it from the competing products or services on the market.
  • Production choices— The value pricing model is a customer-centric system that depends on the customers’ feedback. Adopting this strategy will keep you ahead of the market demands and allow you to develop products that sell.
  • Revenue — As mentioned, this pricing model bases the prices of your products and services on perceived value. Since perceived value is a relative concept, marketing strategies can help you improve it and increase your revenue over time.
  • Customer loyalty— The Value-based pricing method’s customer-centric approach makes your customer’s needs and preferences the focal point of your business operations. As such, this method can help you improve your customer retention rate and increase your customer pool.


Implementing Value Pricing Into 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 and The Centre Stage Effect

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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