One of the best books I have ever read on pricing is Implementing Value Pricing: A Radical Business Model for Professional Firms by Ronald J. Baker. As the title states, the focus is on professional service firms; however, I find the main points and methods helpful for any company wanting to extract the highest price possible.
Baker's main point is quite simple. Our approach to pricing is all backwards. Normally we start with the product or service and derive a price based on our costs:
But that is not how customers buy. Studies show that most customers have a poor idea of what an item should cost. Instead they decide (mostly with emotions rather than logic) what a product is worth. To maximize profits, therefore, price the customer, not the service.
But how do you translate a customer's perception of value into a hard price? Baker suggests following the 5 C's of Value:
- Comprehend what value means for customers. Listen for wants rather than needs. "...what customers buy and consider value is never a product. It is always utility, that is, what a product or service does for them." - Peter Drucker. Or as an owner of a cosmetic company stated, "We don't sell lipstick. We sell hope!"
- Create value for customers. Even if you are selling paperclips, the customer experience is more than just a product. If they are time-starved, make every interaction fast and easy. If they crave connection, add those personal touches.
- Communicate the value you create. High-tech firms often miss the mark here by listing every feature and state-of-the-art component. What customers really care about is WIIFM (what’s in it for me). First address the core need of the potential customer to get his or her attention. Then describe your product/service only in terms of satisfying that need or want.
- Convince customers they must pay for the value. People buy emotionally and justify intellectually. When the potential customer arrives at the “buy now” screen or physical point of purchase, kick in the rational arguments: money saved, service guarantees, happy client testimonials.
- Capture value. Smart pricing should be based on perceived customer value, not your costs and efforts. Consider giving three options: a lower priced basic, starter offer, a high priced premium offer, and a middle “best value” deal that is the obvious choice for most customers. Giving three options allows the customer to make choices but also use your own packages as their reference point for a “good price.”
What value pricing techniques are you using? Share in the Comments section below.