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Pricing products and services is one of the most complicated aspects of any product or marketing strategy. It has a direct effect on sales, revenue, and profit. Furthermore, understanding how price impacts brand perception and vice versa is another important consideration. While it’s important not to price too low (which could lead to long-term issues in achieving business goals), pricing too high might limit the trial use of products – leaving companies with limited volume growth potential down the road.  Finally, achieving equilibrium between marketing and sales teams which typically have different goals when evaluating pricing plans, is also vital for success.

Three approaches to price setting

There are many different ways of deciding how to price a product, but broadly speaking, there are three approaches, each with pros and cons.

- Cost plus pricing: Internal focus

Cost-plus pricing involves calculating total production costs (including materials, labour, and overhead) and adding a markup for profit. To use this method, you must identify production costs and analyse market factors to determine an appropriate markup. Cost-plus is well-known and reliable, but it doesn’t necessarily reflect the value of the product/brand to the consumer. This could lead to missing out on high-value sales, i.e. leaving money on the table.  On the other hand, if too much profit is accounted for in the cost-plus approach, anticipated sales could be misjudged.

- Competitive-based pricing: Competitive focus

Competitive-based pricing is a model where other businesses heavily influence your price points in the same market. This outward-facing approach differs from cost-plus pricing, which looks at your costs. It’s a popular option as it feels like the ‘least risk’ approach. It definitely has its advantages as competitors are an important factor for any setting prices.  It is typically used by ‘price followers’.

- Value-based pricing: Customer/consumer focus

This approach considers perceived value rather than cost or market competition to set price points. It depends on customers' needs and desires, as well as their willingness to pay. People don't think about a product's cost to produce but what value it gives them. Consider handbags, shoes, perfumes, or brands such as Apple, Nike and Starbucks; customers are willing to pay more as they attach high value to these. The cost of these products is often only a fraction of the retail price. This method helps identify a brand/product's pricing power and value. The stronger the brand, the higher the pricing power and prices, and products with a lot of price power are less influenced by inflation.

So, what would be the best pricing approach? 

Unsurprisingly, value-based pricing has the most potential to create a successful long-term strategy. However, costs also need to be taken into account, as any price should result in profit, and keeping an eye on what competitors do is a no-brainer too. We recommend a combination of the three with value-based pricing as the foundation.

5 steps to successful pricing

1. Use the overall company strategy as the goal for pricing

Should your organization win on volume, revenue and profit margin? Winning all three is usually impossible since each requires a different pricing approach. For example, focusing on volume often means lower pricing for less premium products, while profit margin goals require higher pricing.

2. Decide on being a price setter or follower, and act accordingly

Achieving the status of price leader requires dominance in the market, strong branding, or a superior product. Market size is not always a reliable indicator of price leadership, nor is brand prestige. Carefully choose your strategy and maintain consistency in your channel partnerships and marketing communication.

3. Look beyond the price and the business KPIs

The company strategy and the vision is the starting point of any price setting; however, there are other key factors which contribute to the success: (1) your brand, (2) your product/service and (3) the consumers/customers.

Companies often assume adjusting the price will improve sales, revenue, and profits, but it is not the only factor of success. Brand recognition, product quality, and the target audience’s ability and willingness to pay are all key components that should be considered – in some cases, more so than the price.

4. Listen to the customers/consumers

Analysing consumer feedback should guide any pricing strategy. Digging deeper to understand how consumers perceive your brand/product, if it meets their needs, and the value it brings are essential questions to answer. It will tell you, e.g. if your brand is strong enough to sustain a 10% price increase.

5. Educate and create a win-win situation for the different players in the sales channel

Price changes often require approval from multiple levels between the manufacturer and shopper, such as wholesale, distributors, retail, installers, etc. Without approval, there’s a risk of delisting, reduced visibility, and weaker negotiation power. Showing your understanding of consumer needs and what they are willing to pay is key to establishing trusted long-term relationships with sales partners.

Next up

In the following weeks, we’ll share with you more on each of the above 5 aspects and how to choose the best pricing techniques and tools for your business. 

In the meantime, if you need help optimising your brand's portfolio pricing, get in touch with us. Our team is here to assist you in developing your ideal pricing strategy.

Recently, I had an opportunity to participate in “Meaningful Marketing Talks” hosted by BAM. This engaging event was dedicated to “New Humanity Codes”, where marketers tried to define and improve how businesses connect and engage with the environment and customers. These codes of the “New Humanity” were presented by 5 BAM Think Tanks: Sustainability, Well-being, Inclusion and Diversity, Information and communication technologies (MarTech) and Ethics. 

My keynote was focused on sustainability, and specifically on climate & environment. As an insights consultant, I often interview consumers about their views on sustainability. This time, I had the chance to hear from the companies themselves. I interviewed ten companies on how customers influence their sustainability agenda and the difficulties they face implementing it. I’ve learned that businesses can be segmented based on where they are in their sustainability journey, but ultimately, all organizations face the same challenges.  

Big differences in where a company sits in the sustainability journey 

From my conversations with ten companies across different industries (B2C & B2B, Belgian & international, production companies, services companies, and reseller companies), I've noticed that sustainability is not a priority for all companies. In fact, I could place them along a Cost-Value axis, from 'No priority yet' to 'Philosophy driven', with multiple steps in between. Companies on the left side of the axis, the Cost-side, treat sustainable compliance as a cost, mostly driven by a need to comply with government regulations. Companies on the right side of the axis, the Value-side, tend to go beyond what is required by legislation. This is the case for marketing-driven and philosophy-driven companies, for which sustainable practices represent opportunities to create more value. 

All parties play a role in saving the world 

Where companies sit on the Cost-Value axis depends greatly on the kinds of interactions that they have, with company-customer interaction only forming one part of the picture. Indeed, everyone plays a role in saving the world. From my interviews, it became very quickly evident that governments and their regulations play a crucial role in driving sustainable choices by companies. European regulations, as well as international guidelines and standards, can impact the entire value chain of a business, even if it's a non-European company. Next to that, companies themselves impact other companies, and legislation makes the competition fairer between companies, ensuring that all businesses have the same standards to follow. Also, investors and shareholders play an important role, with more and more investors preferring to invest in sustainable companies. Finally, perhaps surprisingly, employees can also be a driving force behind sustainability initiatives.  

When it comes to consumers, it's important to note that the role of the customer in influencing companies varies depending on the company's sector, type of product or service, and specific circumstances. Some companies aren’t impacted by customers’ attitudes towards sustainability, while others may be heavily influenced by the general desire of consumers to make good decisions.  

All of these interactions, and their relative importance to different companies in different sectors, influence where a company sits in their sustainability journey. Despite these significant differences, I identified some common themes across my interviews. 

The 5 common themes are as follows: 

1. It's not about gaining anymore; it's about not losing. Today, sustainability is a hygiene factor instead of a differentiator. Even the least advanced companies on their sustainability journey know that to compete, they must be sustainable. 

2. Money counts for everyone: there's friction between sustainability and affordability. This is not only the case for the customers but also for the companies. 

3. Too little communication: companies need to communicate more about their sustainability efforts. Having a few lines on their website isn't sufficient.

4. Lack of clarity: there are so many different kinds of labels, and nobody knows what anything means anymore. This allows greenwashing to reign free or companies to use their own labels. Meanwhile, consumers are becoming more sensitive to greenwashing and are demanding more transparency and accountability from companies, creating a sustainability trust gap. This trust gap can have an impact on a company's brand reputation and overall success. 

5. The truth is already obsolete: frequent changes in regulation make it very hard for companies to plan ahead or communicate their sustainability practices to consumers. 

Businesses and customers are in this together 

Sustainability is a tricky and ever-changing topic that presents challenges for companies. My research suggests that companies should carefully assess their current position in their sustainability journey and their desired destination. To succeed with a sustainable strategy, companies need to smartly navigate sustainability and affordability, be bold in surpassing existing regulations, and take small steps towards more sustainability whenever possible. 

Effective communication is crucial as well. Companies must clearly and openly communicate their unique selling points and sustainability efforts in their marketing communications. They should also use reliable labels and standards that consumers can trust for clarity. Additionally, companies can leverage social media and QR codes to enhance transparency and engage consumers in sustainable choices. 

By integrating sustainable practices into their strategies and communicating transparently with consumers, companies can create value and establish trust with customers who increasingly prioritize sustainable products and services. Sustainability is a collective effort involving companies, governments, customers, and stakeholders. Despite the challenges, embracing sustainability is a necessity. 

Want to know more about this topic? Reach out to us! 

In one of our previous articles, we gave an overview of different pricing methods and shared tips from our long experience helping international companies set up their winning pricing strategies. To freshen up your memory, there are three key approaches: cost-plus pricing, competitive pricing, and lastly, value-based pricing, which we'll talk about in more detail in this article.  

It's no secret that many business owners struggle to price their products or services. Determining the right price point can be challenging, especially when you have to consider factors like competition, production costs, and target consumers. In recent years, pricing experts (including our team) have been advocating for value-based pricing, and for a good reason, as it can help businesses become and remain both competitive and profitable.  

Let's first determine what value-based pricing is. Value-based pricing is based on a consumer's perceived product or service value. Rather than focusing on the overall market price, competitor pricing, or the cost of raw materials, the value-based pricing method focuses on a customer's willingness to pay. Companies operating on a value-based pricing model can effectively increase profits, improve brand loyalty, strengthen brand equity and attract new customers for quality products.

Understanding value-based pricing 

Pricing can be a tricky game, especially when it comes to products that bring out customers' inner diva, thrill-seeker, or adventurer. We're talking about items that make people feel good about themselves or give them unforgettable experiences. That's when perceived value comes into play, determining how much a customer places worth on a product and ultimately affecting its price tag.

Value-based pricing is all about standing out from the competition. Your product must be designed with the customer's wants and needs in mind, offering improvements and added features they'll love. And let's not forget: quality is king when aiming for this pricing strategy. So if you're looking to add value to your product, you need to keep an open dialogue with your customers. By actively seeking feedback from customers, companies can learn what features customers want in their products and how much they're willing to pay for them.  

Advantages and benefits value-based pricing brings 

Value-based pricing isn't just about charging the most you can for a product. It's a strategic approach that not only maximises profits but also builds loyal customers and a strong brand. By understanding what customers truly value in a product, a business can design future innovations that better meet their needs. This approach doesn't just lead to higher price points and increased customer satisfaction, and a willingness to pay more for products they genuinely love.

Let's discuss in more detail the many benefits of value-based pricing: 

• Increased profitability

Value-based pricing can be a game-changer for business owners looking to boost their profits. By valuing your product or service based on how your customers perceive its worth, you can often command a higher price and benefit from a larger profit margin than a cost-plus strategy. It's all about cleverly pricing your product based on its value to the proverbial table while still keeping an eye on the competition. This way, you can enjoy the best of both worlds: increased profits and happy customers. 

• Improved customer satisfaction

By adopting value-based pricing strategies, you can gain a deeper understanding of your customer's unique tastes and interests. This invaluable insight enables companies to tailor their pricing plans to suit different customer segments better, ultimately leading to heightened satisfaction and loyalty. By emphasising the value they bring to the table, businesses can justify charging a higher price point to customers who appreciate their brand's unique advantages. Ultimately, value-based pricing empowers businesses to understand better and meet the needs of their customers, leading to long-term success and profitability.

• Competitive advantage

Value-based pricing is not just about charging higher prices for your products or services. It's about effectively communicating the value you bring and using that as a competitive advantage. When you differentiate yourself from your competitors in this way, your customers start to see you as a unique option in the marketplace. It's not just about the price tag - it's about the value that you offer. So if you're looking to establish yourself as a top contender in your industry, value-based pricing could be the key to standing out in a crowded market. 

• Flexible pricing

Value-based pricing is a smart move for businesses looking to adapt to the constantly shifting market landscape. With this approach, pricing isn't set in stone but rather adjusts based on trends, customer preferences, and the unique selling situation. It's more than just factoring in production costs, giving businesses the power to make informed decisions about pricing adjustments that keep profitability on track.  

Misconceptions and disadvantages of value-based pricing 

Value-based pricing is very widespread, but there are still misconceptions about this practice, such as: 

• Myth nr.1: Value-based pricing guarantees sales success

Despite careful calculations and thoughtful considerations, value-based pricing is not always a guaranteed road to success. In fact, there are three reasons for this:  

(1) competition: even if you offer more value than the competition, if they have a very aggressive pricing strategy, it could affect your strategy.

(2) the cost: even though value-based pricing is better than cost-plus, costs should always to be considered. If the value-based pricing is lower than cost-plus, then it shows a weak brand.

(3) retailers/distributors: the resellers might not follow your pricing guidelines, meaning their prices might not be aligned with what you recommend.  

In short, value-based pricing is not a standalone method or view. It needs to go hand-in-hand with cost analysis, competitor intelligence and building strong retail/distributor relationships.

• Myth nr. 2: Value-based pricing means companies have to consider every single feature of a product

Value-based pricing is often considered a tedious process of evaluating every aspect of a product and assigning a price to each. However, that's not the case. Instead, customers and consumers don't necessarily evaluate pricing in such detail, as they usually pay attention to aspects that matter the most to them.  

• Myth nr. 3: Value-based pricing is about linking the price to product benefits or quality

This statement is only partially true, as a brand is a big factor. Evaluating the worth of a brand can be quite a conundrum, especially when trying to compare it to competitors with distinguishable product features. Assigning a value to a faster, more durable, or longer-lasting product is a no-brainer. However, when it comes to brand recognition and reputation, it's not as cut and dry. That's why "branding" is so important and why value-based pricing is much more than paying for product benefits. You often value the brand and trust that its product or service comes with the right features. Differentiating based on brand alone can be tricky, leaving much room for subjectivity and debate.

Aside from the misconceptions mentioned above, it's important to emphasise that every pricing method can be high-risk and costly. The same applies to a value-based method.

Here are the four most common challenges to consider before adopting the value-based model:

1. Positioning in a crowded market

Standing out with value-based pricing can be challenging in a sea of competitors. The more crowded the market, the harder it is to convince customers that your product is worth paying more for. Here's where branding comes in again. The stronger your brand is, the more you can stand out. If you don't have a strong brand to begin with, value-based pricing will be difficult.

2. The shifting sands of perceived value

The value your customers place on your product can be a moving target. Trends and tastes shift over time, so if you set your value-based pricing once, it doesn't necessarily mean it will stay relevant forever. You should review your pricing strategy on a regular basis, especially if you know that customer values change fast. 

3. The price is (not so) simple

Setting the right price for your product requires in-depth knowledge of your target market. To truly understand what your customers value, you'll need to invest time and resources into gathering valuable data. But the payoff of an effective value-based pricing strategy can be well worth the effort. 

4. Selling in markets where products are very cost-driven

Value-based pricing rarely works well in markets where people are looking for the lowest price, for example, when buying basic products. Often this strategy is designed to attract a specific segment of customers.

The bottom line 

In conclusion, value-based pricing is an excellent strategy that allows businesses to maximise profitability while ensuring customer satisfaction. Value-based pricing incorporates information about the value customers perceive from a brand, product, its features, and related services. By implementing a value-based pricing strategy, you can differentiate your brand from your competition while ensuring greater customer satisfaction, thus driving profitability. However, the mandatory element to successful pricing lies in extensive customer understanding, suitable strategy, and alignment with all the stakeholders.  

In the following weeks, we'll continue to share more details on value-based pricing and the connection with customer understanding.  

In the meantime, if you need help optimising your brand's portfolio pricing, get in touch with us. Our team is here to assist you in developing your ideal pricing strategy. 

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