Value-based pricing is one e-commerce pricing strategy you can use to increase your profits and dominate your competitors.
Think about it like this:
How much would you pay for a pile of metal, rubber and a few connecting wires? Probably not that much.
Compare that to how much you’d pay for a car.
The difference between the two is what’s known as value-based pricing.
The thing is, pricing is just a number, but that number represents what a customer thinks the item is worth.
If you can get the value-based pricing right it means you’ll be able to keep your prices high without fear of alienating any of your customers.
In this post, we’re going to understand exactly what value-based pricing is, how you can adapt your store to consider this and some best practices.
Ready, steady, go!
You’re encouraged to create higher quality products
When you create a value-based pricing strategy, it forces you to think about the quality of your products.
Your customers are happy to pay a premium if they receive a premium product and premium service.
Let’s look at an example.
This belt from Mr. Porter. This is a real leather belt and if you want to purchase it, you’ll have to have a spare £590 ($759).
Compare it to this belt on Amazon (also real leather) but this one only costs £34.00 (43.75).
You can easily see that the difference between these two prices is substantial.
What makes the £590 belt better than the £34.00?
Without looking further into the specifics of the product details, you could argue the only thing that’s different between the two offerings is the value of the product.
The first product might use better material, or have an interesting story as to how it was created.
Let’s pretend for example that the first product uses higher quality products.
Because they use higher-quality products, the value of the item increases and therefore the price does too.
But not all value is associated with quality.
Think about Apple for example. They’re able to do value-based pricing because people associate their products with the high-end and their prices reflect that.
This MacBook would cost you over £2,000 ($3024). For that price, you’d expect super high quality, right?
Not the case.
Especially in some of their newer iterations, Apple seemed to have produced lower-quality products with many users encountering various different issues.
This isn’t to say that you don’t need to think about quality. What it means is that if you’re entering new products into a new market using a value-based pricing strategy, quality should be the most important factor.
Understand your customers
The first step with a value-based pricing strategy is to understand your customers. If you don’t know who your customers are, you also don’t know what they value.
And guess what happens if you don’t know what they value?
You get your pricing wrong.
Understanding your customers goes beyond knowing their age and their gender (although these are important details).
It involves understanding their pain points and desires so you can create a product that will help improve their lives.
One of the best ways to understand your customers is to talk to them.
Ideally, you’ll talk to current customers (to find out how people who have already purchased your products feel about you) potential customers (to find out why someone considered buying, but ultimately didn’t) and finally people who’ve never heard of you before.
Doing this will give you a great idea as to how your brand and products are perceived by a range of different people.
You should start by building your buyer personas.
Buyers personas are a way for you to document everything you know about your customers. As you can see in the image above, you should try to learn as much about your customers as possible, beyond where they live and how old they are.
Armed with this information, you can position your products in a way you know will speak to them directly.
Identify what features of your products create value
You already know your customers. You know what they value and what they’re happy to pay a premium for.
Now, you need to decide which aspects of your products have that value.
When you’ve identified which aspects of your products your customers value, it’s time to highlight this.
There are a number of ways you can highlight the value of your products, but largely it falls down to how you present them.
If there’s a specific feature you’re proud of and you know your customers will appreciate, why not try and showcase this through your product imagery.
Or you could try and make these points known through your product descriptions.
But value doesn’t just start and stop at your products. It needs to be company-wide. This means having excellent customer support with fast response times, and a nice website with simple UX so your customers can easily find the products they’re looking for and place an order.
Let’s look at an example.
This fitness tracker starts at £99.99. It has a range of features as you can see on the right-hand side. Compare it, then, to this fitness tracker.
You’ll immediately notice they look very similar. The main difference? The price.
This fitness tracker is only £17.48
So how is it possible that the first tracker was able to charge almost £100 for their tracker and this one only charges £17.48?
Surely no one would buy the more expensive one and everyone would just get this one? Especially as the cheaper one has good reviews too.
Well, it’s easier to understand why when we look into the specifics of the product.
The cheaper tracker doesn’t have any GPS tracking abilities.
Now, imagine for a second, you’re super into your fitness, it’s a daily part of your life and you take an active approach into improving this aspect.
If you wanted GPS features, you’d be happy to pay for the more expensive one right?
After all, you’re super into your fitness so this product would pay for itself for the number of times you used it.
Now suppose you’re sort of into your fitness, but you don’t care about GPS tracking abilities. You just want the tracker to count your steps.
Suddenly, there’s no value in you buying the more expensive tracker, especially when the cheaper one does everything you need.
Don’t be afraid of the data
We speak with a lot of e-commerce owners and time and time again we find they’re scared to look into their pricing.
Sometimes it’s because it’s confusing.
Sometimes it’s because they’re afraid to change their prices and ruin their sales targets.
Sometimes it’s because they just don’t know how to analyze the data and use that to their advantage.
But if you want to do value-based pricing successfully, you need to stop being afraid of data.
The best way to use a value-based pricing strategy is to combine the data from your customer research and yours and your competitors’ pricing data to align your prices to the perfect amount.
You already know that with a value-based pricing strategy you can charge more for your products because their worth is positioned by their value and not by their price.
However, this doesn’t mean you can go wild and charge whatever you want.
You still need to consider the optimum price. You still need to consider what your customers would be happy to pay for such an item and finally you need to consider where you want to position yourself in the market.
If you’re 100x more expensive than your next lowest competitor, you need to think about why. Is this price justified? Have you created enough value around your brand or product to warrant such a high price?
Using a price tracking tool will provide you with all the data you need to ensure your prices are affordable for those who are happy to pay a premium.
Some also might think that because they offer value-based pricing, they can’t change their prices.
Questions we’ve heard from the community:
- If I lower my prices surely my value will fall?
- If I increase my prices, surely people will stop buying?
The answer to both of these questions is ‘no’. If you get your value-based pricing strategy right you can still raise and lower your prices as and when you need to.
This is because your strategy is based less on price and more on value.
In fact, there will be products out there who focus solely on value but still have a low (non-premium) price tag.
They’ll often generate plenty of sales from people who want good quality items, but don’t (or can’t) pay a premium.
Value-based pricing: The be all and end all?
Although we’ve presented a range of reasons why value-based pricing is effective and how you can win at it, it shouldn’t be the only tool in your arsenal.
Value-based pricing works best on e-commerce stores that use this strategy amongst a range of others.
The first step is to stop being scared of data and really dive deep into yours and your competitor’s pricing to come to an understanding of the right price.
The next step is to figure out which of your product line would benefit from value based-pricing.
Your customers are ready for value-based pricing, but are you?
Have you given value-based pricing a go? Leave a comment below.