Mastering Value-Based Pricing: What Are Your Services Really Worth?

9 min read

June 21st, 2024

One of the biggest challenges and biggest decisions in running a business is determining your prices.

Several factors can and should impact how much you charge for your products and services. Costs, market, industry, geography, business type, and demand all impact pricing. In addition to these more concrete pricing factors, perceived value - a more abstract concept - can also have a major impact on your business's pricing, especially if you choose to adopt a value-based pricing strategy. 

Value-Based Pricing Definition: What Is Value-Based Pricing?

Value-based pricing is a pricing strategy that establishes prices for products or services based on the customer's perceived value of the products or services (i.e. the amount customers believe products or services are worth). In other words, the value-based pricing strategy aims to charge as much as customers are willing to pay. 

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When Does a Value-Based Pricing Model Work Best?

Value-based prices are not the right pricing strategy for every business. Generally, value-based pricing works best for businesses in the following circumstances:

When Your Services or Products Are Considered Scarce

If you offer unique, rare, or scarce services or products, then your business's offerings can be considered and perceived as scarce. This can also apply when the services you provide require a significant amount of expertise, education, experience, or qualifications. Likewise, if your business has a uniquely positive track record of delivering exceptionally positive results to clients, then your quality of offerings can be considered scarce.

Scarcity increases the perceived value of your products and services, and this perceived value can be used to justify value-based pricing. 

When Your Business Is Differentiated From the Competition

In some sense, differentiation is similar to scarcity because your business's products and services can't quite be considered scarce if you have multiple competitors offering similar products and services. This means that for value-based pricing to work for your business, you must be able to demonstrate a notable differentiation between your business and its products and services and that of your competition. 

For example, you can differentiate by offering a product or service that is:

• Notably different 
• Delivering better results
• Solving problems (currently ignored by your competitors)
• Higher quality
• Award-winning
• Highly praised or reviewed
• Recommended by a trustworthy, notable source (i.e. a top client)
• Leading the industry

When Your Market Segment Is Willing to Pay Value-Based Prices

No matter what industry you're operating in, the entire market will not be willing to pay value-based pricing for your products or services. So, before you decide to offer value-based pricing, it's important to look closely at your market strategy and identify which market segment is most lucrative for your business and most compatible with your brand. 

If you choose to charge value-based prices, then you need to target the right segment of your market by identifying how best to appeal to, communicate, and connect with them. 

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When You Offer Customer-Based Products and Services

Perceived value increases when the services, products, improvements, differentiation, or added features that your business offers are based on the needs and wants of your customers (i.e. when your business aims to solve your customers' problems and improve their lives). Improved quality of life and solved problems are often considered priceless, which means you have more flexibility in determining how much to charge for the luxuries, expertise, or conveniences you provide. 

Is Value-Based Pricing Right for You? The Pros and Cons of Value-Based Pricing

Consider the advantages and disadvantages of value-based pricing before determining whether or not value-based pricing is right for your business.

Value-Based Pricing Pros

• Potential Market Penetration - Value-based pricing can help you penetrate the market if your offerings are perceived as limited or new. This is especially true if you're offering legitimately unique products or services and if the market in your industry doesn't have much brand loyalty. 
• Bigger Profit Margin - With value-based pricing, you can build larger profit margins into your pricing, which means this pricing model can help you increase overall profits - as long as you're able to maintain relatively stable costs while shifting to a value-based pricing strategy. 
• Increased Perceived Value - The psychology of pricing demonstrates that price alone can impact the perceived value of a product or service. Consumers tend to perceive higher-priced products and services as more valuable than lower-priced products and services. 

Value-Based Pricing Cons

• Higher Markups Can Be Difficult - If you're selling products, and these products are considered commodities, then you'll likely have a more difficult time selling them with higher markups. Unless you can manage to differentiate what you're selling from your competition, demonstrating greater value or quality, you'll struggle to differentiate from your competition. In these categories, the stiff competition tends to drive prices down. 
• Perceived Value Is Unstable - The perception (i.e. perceived value) of your brand, business, products, or services is not always stable. The opinions of consumers can shift rapidly depending on trends, economic shifts, culture, and even technology. So, if your offerings are perceived as high-value today, they might not be tomorrow. It's up to your business to continually demonstrate and prove its ongoing value. 
• Prices Can Be Trickier to Set - Value-based pricing can be challenging to nail down. Of course, you can use things like customer feedback, market research, and an analysis of your competitors to help you determine how much people will be willing to pay to do business with you. However, setting prices based on value is much less straightforward than using an alternative pricing strategy. 

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Optimize Your Prices: 5 Value-Based Pricing Best Practices

1. Use the Value Stick to Visualize Value-Based Prices

Business leaders use the value stick to visualize and adjust the various categories built into a value-based pricing strategy. The value stick is a visual representation of value-based pricing that stacks the customer's willingness to pay (WTP), the price (i.e. firm margin), and cost on top of the business's willingness to sell (WTS) (i.e. the lowest amount the business is willing to accept in exchange for its product or service). 

2. Focus on a Single Market Segment

In order for a product or service to be perceived as high-value and justify value-based pricing, it must have a strong appeal to a very specific market segment. In other words, your product or service should be able to be advertised as specifically tailored to meet the needs of that market. It's difficult to successfully achieve value-based pricing if you are attempting to appeal to the masses. A white-glove service or high-value product must appeal to a specific market niche. 

3. Evaluate the Next-Best Alternative

Once you've identified your market, ask yourself what product or service your customers would choose if your business didn't exist. Now, look at your competitor's offerings and prices and use this as a roadmap to gauge how much you should be able to charge. 

4. Don't Assume You Are the Best

When evaluating the next-best alternative to your business, don't assume you are the best or the better option. Actively search for and identify ways that your competition has you beat. Identify and list all of the features that add up to make your competitor's product the best and then do some research to find out how much your customers value these features.

This is the only way to fairly assess your own business's products and services and to determine how much you can charge for them based on your perceived value. 

5. Know Your Differentiated Worth and Put a Dollar Amount on It

Now that you've looked at the competition, make a list of all the features and factors of your products and services that make your business great and unique. Do some research to determine how valuable these features are to your market segment. Finally, you'll put a dollar amount on your products and services based on their perceived value. 

When assessing your business and determining a dollar amount, consider:

• Your brand's advantage
• Your unique value proposition (UVP) - in other words, what differentiates you from the competition
• The value your product or service provides to your customers (Is there any way to calculate your average customer's ROI?)

Optimize Your Value-Based Pricing Strategy With Outsourced Accounting for Businesses

Using a value-based pricing strategy can help you strengthen your brand and position your business as a leader in your industry. While other pricing strategies might be more straightforward, they often leave money on the table. 

You should be able to look to your back office and financial data to answer the questions posed during the value-based pricing strategy process. However, if you come up without answers or the information you need to optimize your prices and ensure your business is generating the profit margins it deserves, then assistance from an outsourced accounting services provider can help. 

An outsourced accounting services provider can help you understand your true costs, identify your unique value proposition, and optimize your pricing strategy to ensure you're asking enough not just to cover your costs and generate a small profit but enough to elevate the perceived value of your business and brand in addition to everything it has to offer.