We are a society obsessed with finding a “good deal”, which is why customers today place such a heavy emphasis on pricing. This leaves the business owner with plenty of questions: What should I charge? What profit will I achieve at $x price? How much is too much?

Pricing has traditionally been reliant on a more cost determinant approach. It has always been “this is how much it costs to make the product/provide the service and we will charge an x% markup.” However, this method is outdated and more recently, companies are starting to utilize the idea of value based pricing.Value based pricing

In order to shift our mindset we must first understand one concept: customers and businesses only agree on one aspect of pricing. There are three pieces within every business transaction:

  1. Price
  2. Cost
  3. Value

The business wants to increase the price of its products and services to make more money. Inversely, the customer wants to pay less for a product so that they can save money. The business also wants to spend as little as possible to provide its products and services. A customer could not care less what the costs were to the business, all they see is the final product. Finally, a customer wants to get value from their purchase. Otherwise, there would not be a transaction. Congruently, the business also wants the customer to get value from the purchase, hoping that it will lead to a long term relationship. Out of these three factors, value is the common ground between customers and businesses and needs to be the focal point when it is time to start pricing.Value based pricing equation

Now comes the tricky part. Everyone receives value differently. There are customers that will have a very high sense of value after receiving the product or service. However, you can offer the exact same product or service to another customer and there could be little to no value at all. This is because value is subjective. The solution to this problem is simple, but not easy. The business really needs to understand its customers. By discovering more about the customers, a business can use that knowledge to efficiently price its goods and services.

Over the next couple of entries in this Value Pricing Series, we will discuss the value conversation and what types of questions need to be asked in order to truly understand the customer and his/her idea of value. Then, we will build upon that so that we will be ready to deliver the price to the customers.

To read the whole Value Pricing series please click here.