38. Value Pricing
Many business owners work hard to get their product right and attracting potential customers. But spend little time on the decision that rewards all that hard work – setting the price.
There are various ways to calculate price: cost plus, competition based pricing and value pricing to name a few.
Value Pricing is the price your customer is willing to pay and thus the price your business can charge is the perceived value in the customer’s eyes. When setting the price you must understand your customer and why they are purchasing from you. This influences their perceived value and therefore the price they are willing to pay.
There are many different ways to price your products. So there's a markup, marking your price up, looking at what your competitors sell.
Another way is value pricing, so pricing according to the value of the customer. And I just wanna share a quick story, and it's about a Chinese silk manufacturer. It's from a book, and I can't remember its name at the moment, where the Chinese silk manufacturer was making silk scarves, selling them to, in China, but they also sold them to a French retailer. And then the French retailer was selling the scarves for, I think it was three or four or five times the price that they were selling the scarves.
And then they weren't selling as many scarves even though they were 1/3 or 1/2 the price that the French retailer was selling inside China. So what they did was they went and surveyed the customers who were buying the scarves to find out. What they find out were that people who were buying the scarves were mainly buying the scarves as gifts. They didn't want to be seen as being cheap when they gave gifts, so they bought exactly the same scarf but at a higher price with a brand name so that they appeared to be generous.
This is where if you're gonna do value pricing, you need to understand why the customer is buying from you. So just as the Chinese silk manufacturer went and found out why. And one of the frameworks that we like to use is the jobs to be done framework.
If you haven't heard of that, I'd encourage you to Google, or contact us and we can talk about the jobs to be done framework. It's a little bit different than coming up with a customer avatar. It's actually finding out why the customer is buying from you. And then once you've found out why they're buying from you, then you can set the price on value, not on your profit margins. So before you start working out value pricing, remember it's value to the customer, not what you value yourself at. You need to understand why the customer is buying from you and then set the price based on value.