Rising material and labour costs, decreasing purchasing power, a competitive market and high promotional pressure: no wonder many companies struggle with price setting in today's economy. There is unfortunately no ready-made formula to follow. Understanding your brand, product, market and customers is essential to get your pricing right. Building a pricing strategy without these insights is like building a house on quicksand. An insight-driven method such as value-based pricing is not the easiest to implement, but it is rewarding in the long run. It allows you to maximise your price potential, especially if combined with increased brand equity as this will result in lower price elasticity.
The importance of a strategic approach
How loyal are your customers? Do you understand how competitors set their prices? What is the price elasticity of your brand compared to competitors? How resistant are they to inflation? Do you know what your customers value the most: your brand, product quality or package design?
If you rely solely on gut feelings to answer these questions your current pricing strategy might be suboptimal. Whether you choose cost-plus, competitive-based or value-based pricing, you always need a certain amount of data and insights to set the right price. Unlike the other methods, value-based pricing requires a deep understanding of your customers and consumers in general, viewing price as an expression of the value you offer. It is the only approach that allows you to maximise your price potential while building brand equity, because once you know what consumers and customers value and what drives their choice, you can deliver an offer tailored to their needs. This often results in a higher willingness to pay.
5 steps to value-based-pricing
Working with our clients, we have seen time and time again that there are five important steps to implement this approach successfully. The overall company strategy should always be your starting point (1), ensure the price is in line with the brand, product and consumer (2), listen closely to consumers and customers (3), create a win-win for all channel partners (4) and analyse whether your market research data is in line with pre-existing knowledge (5).
- Start from the overall company goal
Although it might seem obvious, it is not always clear why a company wants to adjust their prices. Do you want to focus on volume, revenue, profit or even increasing customer satisfaction? If your goal is increasing volume, you will probably lower your prices, whereas optimising profit might mean higher prices. The KPI you decide to focus on determines your optimal price, as optimising all is rarely possible.
- Look beyond price and business KPIs
Regardless of the KPI you prioritise, price isn’t a standalone feature. It should always be aligned with your brand, product or service and target consumer or customer.
- Whether consumers think of your brand as trusted, premium or trendy will impact the price they are willing to pay.
- Do you understand why people choose your product? Is it the brand or packaging design? The colour or product quality? This influences the price you can ask.
- And what about your consumers and customers? How price sensitive are they, and are they all equally sensitive or are some segments willing to pay more because they truly love your products or brands?
- Listen to the customer
You will need data to identify the customers’ willingness to pay and your brand’s price elasticity. It will also allow you to understand how customers value your products. A combination of methods will help you achieve this. Transactional data capturing customers’ past behaviour enables you to predict the impact of past price changes on sales. Qualitative research gives more insights into the value drivers and willingness to pay, especially for customers who are hard to reach. Various quantitative methods (such as Van Westendorp, Gabor Granger or conjoint analysis) will help you predict future behaviour for pricing scenarios that have not yet been seen in the market.
- Create a win-win for all channel partners
No matter how solid your price strategy is, it will fail if you don’t get your partners to agree and adapt their prices accordingly. Share your knowledge with them, educate them on consumer insights and possibly split some gains to get them on board and build long-term relationships.
- Build your final price setting on four inputs
Lastly, avoid solely relying on market research for your new pricing strategy. Make sure it is aligned with the company strategy and take internal knowledge, expertise and existing data into the equation. Talk to as many stakeholders as possible and capture their insights, especially if your business has been around for quite some time and already navigated many challenges. Build on the experience you already have.
Keen to know more about value-based pricing and how to optimise your price potential? Get in touch!
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