Value Based Pricing
Note: read our last blog article, Value Based Buying, before reading this post.
Value Based Pricing (VBP) is the process of setting a price to capture the value a potential customer will receive. If you understand the insights we covered in the post Value Based Buying, then you’ll easily understand why VBP makes sense.
7 Steps to Calculate Your Value Based Price
Here are the steps:
- Define the who: Customer, persona, market segment
- Define the second best option (SBO)
- Identify the price of the SBO
- List all the differences, including your advantages and your competitors advantages
- Estimate the value your WHO places on each of the differences
- Do the math:
WTP (Willingness to Pay) = Item 3 + Item 5
All customers are different: which one do you think about when doing this analysis? Choose a customer who has already purchased from you. Then, choose a customer who chose not to buy from you, and do the analysis again. The reason you want to do the exercise with both in mind is because customers who buy from you, and those who don’t, value your offering differently. This is especially true for each of your advantages and disadvantages. As a marketer, your target market should be the customers who value your advantages; you should price with these customers in mind.
Further Insight into your Value Based Price
Remember: this exercise doesn’t give you the “right” answer. It gets you close. It gives you an insight into how your customers make buying decisions, and creates a price based on their perceived value, which you can then assess to see if it makes sense.
Ultimately, you’ll have to tweak the resultant price up or down based on your judgment and experience. If you’re trying to reach a broader market, you may want to reduce the price. However, a better and more profitable strategy may be price segmentation, which you can read more about here.
Don’t skip this exercise.
Even if you end up with the same price range you’re currently using, it forces you to think about your customer’s decision process, and what they value. This is hugely valuable to you.
The action you can take today
Use the 6 steps above to calculate your VBP for one of your products. Start by gathering information about your customers by talking to them.
This exercise is often called “Economic Value Estimation” and there is an entire course on how to do this at ChampionsofValue.com
Join the Conversation!
Have a question or comment about this blog? Share your opinion in our Champions of Value Community.
Mark is a pricing expert who helps companies understand value, how to create it, communicate it and capture it. He has a PhD from U.C. Berkeley and an MBA from Santa Clara University, plus 25+ years pricing experience. As an educator, speaker and coach, Mark applies innovative, value-based pricing strategies to guide growth and increase profits for large and small companies.