Cost-plus pricing is the standard strategy. It’s easy because it doesn’t require market research or understanding the psychology of customers or competitors. It is also inefficient and does not maximize profits. Cost-plus pricing assigns the same margin to every customer even though we know that customers have different price sensitivities and emotional values. Cost-plus pricing can be effectively used to set price and margin floors. These floors can be used as the starting point for developing a value-based pricing strategy.
Value-based pricing takes time and data but it maximizes profit per customer. By pricing per customer, per product, and per market, you focus on the customer to set your price. For example, large customers with tremendous buying power are priced differently than small customers who make infrequent purchases. Unlike static cost-plus or competitive pricing strategies, value-based pricing is more dynamic and because it is more customer-based, it can improve marketing efforts as well. After all, once you understand your high-value customers, you can grow by targeting leads that resemble these customers.
Competitive pricing is essentially price plagiarism. You look at what the competition is doing and price your products accordingly. Using this strategy places, no more value on your products or brand than that of your competitors.
Choosing Your Pricing Strategy
Know Your Value Metric
Your value metric is how you measure your product’s per-unit value, and ultimately one of the main factors in how you arrive at an actual price. If you’re selling a straightforward product say, pencils your value metric would be per pencil. If you’re selling a consulting service, your value metric would likely be per hour.
Decide on a Pricing Model
Value metrics also help you determine your pricing model. Your pricing model depends on whether you’ll charge one price for a product or different prices based on product packages or levels of service.
Your pencils, for instance, would likely follow a flat-rate pricing model (every pencil or pack of pencils costs the same amount). Consulting services, on the other hand, may require a tiered pricing approach where buyers can decide on the level of service they need and be priced accordingly.
Utilize Buyer Personas
Buyer personas can be used to determine the price buyers would be willing to pay for your product. A customer purchasing a high-volume of office supplies (like your pencils) is likely to have cost savings at the top of their priority list.
A large corporation purchasing an enterprise-wide software system and consulting service is likely to put more focus on value and relationships, then worry about price as one of many contributing factors.