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Value-Based Pricing Strategy: How to Implement it and Avoid Risks

By Priceva
on July 06, 2022
Have you ever wondered how giants like Apple manage to sell millions of products for above-average prices? What motivates people to spend hundreds of dollars on prestigious items? The answer is a properly implemented value-based pricing strategy. This article will show you how this pricing method works, when it can and should be implemented, and the hidden risks of this approach.

What is Value-Based Pricing?

Value-based pricing is a marketing strategy based on customers’ willingness to buy a product. A company strives to encourage a certain market segment to buy a product by delivering a high value that can be based on exceptional quality, scarcity, exclusiveness or innovations. The strategy works when there is a clear product differentiation: a high-value item stands out from the lineup of substitutes, which makes it worth the price.

This is a complex approach that allows companies to find a well-balanced price in regards to their brand, product features, customer demographics and market conditions. To leverage a value-based pricing strategy, it is important to study buyers’ requests and needs in detail.

When is Value-Based Pricing Used?

This strategy works best when the perceived value of the goods is high. Typically, it applies to fashionable wearables, products that endow the owner with a certain level of prestige, well-promoted or unique items, and limited collections.

Designer clothing brands are among those that exercise value-based pricing. Although a designer dress may cost more than a mass-market dress to produce, the status carried by the brand can multiply the perceived value of the piece of clothing. Many well-established companies capitalize on customers’ value perception and keep increasing their margins without compromising prices.


The same approach is effective when customers are emotionally motivated to buy. For example, works of modern art and NFTs are bought for millions of dollars at auctions, while the nominal cost of creating a drawing is just a fraction of the price tag. The value and price are based on the artists’ popularity, and other similar emotional aspects may come into play during such purchases.


Scarcity is another factor that adds value, and its application is not limited to exclusive diamond jewelry and expensive one-of-a-kind cars. Imagine a situation when you visit a festival with a tiny food court. The price of a hot dog is $15, although you can buy the same dish for $3 in a fast-food restaurant one mile away. The difference in price is based on the scarcity at the festival: hungry people will agree to pay this sum because they are hungry right now and the choice of food on the festival is scarce.

Types of value-based pricing

There are two models of value-based pricing:

  • Good-value pricing, where decent quality and service are combined and offered at a reasonable price. Apple’s products are a nice example because their electronic devices proved to be lasting and reliable.
  • Value-added pricing, where a product possesses more features and functions to differentiate an offer. It is not necessarily a tangible advantage. For example, luxury items are valued higher simply because of the brand’s name.

Cost-Plus Pricing vs. Value-Based Pricing

Value-based pricing is not the same thing as cost-plus pricing, where the seller simply calculates production costs and adds a premium. A cost-plus pricing strategy is commonly used for retail goods with numerous substitutes, the quality of which is pretty much the same.

Value-based pricing strategies can be implemented when there’s a clear differentiation between products. A seller can justify the price by the product’s outstanding features. Note that the quality of an expensive product should meet customers’ value expectations, otherwise it will be simply overpriced in their eyes.

Examples of Value-Based Pricing

Real estate is one of the industries where a value-based pricing strategy is practiced all the time. Here, the need for the product is so high that prices hardly have any impact on sales, especially when the region’s economy is flourishing. An apartment can be perceived as more valuable due to its location (and the reputation of the place), floor, nature, the infrastructure around, etc. All these aspects have no influence on the cost of the building, but can make the property more comfortable and appealing for buyers.

At the same time, value-based pricing can be applied not only to life-critical products like property and foods, but also to items that are sold well thanks to the brand’s reputation. Let us take a look at the example below.

Apple’s accessories for iPhones and Macbooks (keyboards, headphones, chargers, etc.), are priced several times higher than similar products. Technically, their functionality is comparable to goods from Samsung, Sony and other well-established producers. However, the brand can afford to capitalize on its reputation and loyalty of customers — many associate Apple with quality.

Value-Based Pricing for Online Retailers

The above-mentioned Samsung provides several lineups of products targeted at different customer segments. For example, they offer smartphones under $200, for $600, and models over $1,800. These devices have different features but basically perform the same functions and their self-cost does not vary to a large extent. The only job of marketers is to promote them to the right audience.

If you have a limited range of different products, it makes sense to divide your audience into segments and figure out the optimal pricing for each category. You can even experiment with your pricing approaches to figure out the best average quotes for each segment (don’t forget about price elasticity though). If your product assortment is broad, conducting research for each product would be too challenging.

Advantages of Value-Based Pricing

Value-based pricing has many advantages for certain segments of products and industries. Here is how you can benefit from it.

It Could be Easy to Penetrate the Market

If you target markets without a clear leader or low competition level, it will be easier for you to acquire a share of the market, especially when your product or service can be well differentiated. For example, exclusive and limited collections of luxury items are sold very quickly for any set price.

Higher Prices are Possible

The value-based pricing model can be very effective when goods are considered to be prestigious and exclusive. In this case, customers emphasize the product’s intangible value, not its price.

High-fashion clothing, art, sports cars — all these goods have much higher markups because of the added value of ownership. Consumers are ready to pay for the privilege of owning an exclusive drawing or unique vehicle because of the intangible benefits coming with the product.

Your Perceived Value Can Increase

A value-based pricing strategy can be exercised on many different products when you shift the perceived value in the desired direction. Running promotional campaigns and showing advertisements that position your goods as prestigious can justify the high cost in the eyes of your target audience.

If you cannot add intangible benefits to the product, you can focus on the actual value created by the product. For example, some manufacturers of sunflower oil emphasize that their product does not contain cholesterol (even though that is true of any plant-based oil because of its non-animal origin).

Here, the seller exploits customers’ psychology. Buyers start perceiving the ‘cholesterol-free’ label as a health benefit and are ready to pay more. But such advantages as this one are either overrated, or used to deliberately address certain pain points.

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Disadvantages of Value-Based Pricing

Before you decide to introduce value-based pricing, you should be aware of its drawbacks and the risks involved.

The desired price is not always achievable

If you want to have a high markup with the help of your value-based pricing model, make sure you are able to compete on the market. The majority of industries offer a huge variety of options for customers. Unless there is something outstanding about your product, you will not be able to justify the cost of your goods for the customer.

In fact, markups can be lower than you need to grow your company to the desired scale. Hence, value pricing is not always the best solution, especially when you have strong competitors around.

It does not guarantee stable income

The perceived value of a product can change for different reasons: a decline in the economy, technological factors, cultural changes, and other aspects that are out of your control.

Hence, no one can guarantee that value-based pricing will work well for your company forever. Relying on a high markup for your margin growth can be a mistake — the market can become accustomed to your goods and start seeing less value in them. Or a competitor may come up with a better offer and a higher perceived value than your product. In this case, you will have to lower the price to keep up the sales volume, which may seriously affect your income.

It takes time to figure out the right price

As opposed to a cost-plus pricing strategy, finding the right price point with value-based pricing is more challenging. It is hard to know for sure which price will satisfy all your customers and how high the product will be valued on the market.

To learn more about buyers’ pricing expectations and preferences, you need to perform market research, collect feedback and analyze competitors. This information will help you calculate an approximate price, but you will not know the perceived value of your product until it hits the shelves. This is when you can compare real sales volumes with expected ones.

How to leverage a value-based pricing strategy

When implementing a value-based pricing strategy, you need to know how the product is perceived by consumers. Since the price will be higher than with a cost-plus strategy, your goods should outperform competitors’ offers in some way (offer more value for consumers). For this reason, you need in-depth market research and comprehensive statistics.

Consider using Priceva’s price optimization service — it can help you implement a value-based pricing strategy by offering:
  • Relevant information about the pricing of your and your competitors’ products.
  • Suggestions based on price elasticity.
  • Different price scenarios for you to find the balance between profit margin and customer satisfaction.

Priceva’s algorithms will help you analyze and predict how price changes impact buyers’ behavior and what is the optimal price point.

Conclusion

Being aware of how customers perceive the value of a product is crucial for any business. When you understand how they see your product and how it compares to competitors’ analogs, you can set the right price that will not repel buyers.

Once you learn to deliver what customers expect, you will be able to make an offer they can’t refuse. A properly implemented value-based pricing strategy allows you to scale up your profit margin and stand out from the competition.

FAQ

Why would you use value-based pricing?

This method allows you to set higher prices than with a cost-plus strategy, so you can greatly increase your profit margin. Besides that, value-based pricing contributes to building a premium brand image.

What industries use value-based pricing?

It is often practiced for goods with scarcity, exclusiveness, prestige and status, for example, in real estate, luxury goods, high-fashion clothing, and sports cars. In the retail sphere, it is a bit harder to implement because of fierce competition, but companies still manage to take advantage of highly valuable products and features. Value pricing model is used in such industries as SaaS, cosmetics and technology.

What is a good value pricing strategy?

This strategy can be implemented well when a company meets customers’ expectations in terms of perceived value. The product should differ from its analogs in terms of quality or properties, or possess intangible benefits like scarcity or exclusiveness. Customers are ready to pay extra for goods with very strong competitive advantages.

How do you create a value-based pricing strategy?

First of all, you need to make sure that the market is diluted or does not have a clear leader — otherwise, it will be hard to compete. Find out the customers’ expectations and what sort of added value you can offer. When you find out how to differentiate the product, research the market to calculate an optimal price. Most likely, you will correct your quotes after the product release because only real sales can show whether you’re charging too much or too little.

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