It may seem like a statement of the obvious that profit is linked to pricing and yet, all too often, companies set their pricing re-actively. I recently attended a ‘Pricing to Capture Value’ event, hosted by Consult Australia, and was most interested in the insights around those who set the prices at the premium end of the market. The suggestion was that the rest of the market looks at those top price setters and pitches their pricing accordingly. The expert at the event was Colin Jasper from Jasper Consulting. He largely deals with the professional services sector, but I found his experience around pricing has value that any industry can consider – in particular, the power of value pricing. After all, when you are the best in your market, and sought after for your expertise, you really should be able to virtually set your own price.
How value pricing works
Value pricing is simply setting your price based on the value you provide to your customer, rather than purely an expense recovery plus margin approach. This can be due to something unique you provide, or how you provide it. For example, maybe you provide a service faster, or with more reliability when it is critically needed (e.g. in an emergency or breakdown situation). As a customer, you are likely willing to pay higher prices in these situations.
Apple uses value pricing well. Their slogan – Think Differently – suggests they approach their products and services differently and, in certain instances, they do. However, it’s the perceived value in the minds of its customers that matters most. On technical attributes alone, Apple products don’t always come out on top, but when the bigger brand ethos comes into the picture, people pay to be part of the Apple community. They price on value and that places them in the premium end of the market.
Starbucks is another great example of value pricing. In this article (http://www.priceintelligently.com/blog/bid/184451/how-starbucks-uses-pricing-strategy-for-profit-maximization), it states that a 1% increase in prices will contribute to an 11% increase in margin – not a bad return. It goes on to talk about how Starbucks masterfully undertakes customer research and analysis to determine the maximum customers are prepared to pay for their offering before they reach a point where they risk losing too many of them. Historically, their price increases have deterred the more price sensitive and left a loyal customer base of higher income consumers who are prepared to pay for the Starbucks offer. They use price to enhance their premium image with customers – and remember, when Starbucks first launched their $2 coffee, the average price for coffee in a diner in America was 50c.
The consideration for your business
I encourage you to look at your pricing from the perspective of what you offer your customers – specifically who your ideal customer is and what problem you are solving for them. Research indicates that value pricing leads to higher profits, while cost-based and competitor-based pricing are likely to be detrimental to profitability (see this article https://www.icaew.com/en/technical/business-resources/business-management-and-strategy/strategy-resources/how-to-get-your-pricing-strategy-right-and-increase-business-profitability). As suggested by that article, one way to look at it is the value of your customers’ best alternative plus the differentiation you provide. It gives the example of a company that had priced its products as commodities in line with competitors and, after senior staff workshops and customer focus groups, identified their differentiation and successfully established an 8% premium.
Beyond the benefit of healthier profits, challenging your pricing is also an important exercise in evaluating your competitive strategy in light of your customers and competitors to ensure you’re built for sustainability.