Using Pricing to Build Value, Not Discount It

Value-based pricing can help companies improve profitability while building long-term customer loyalty.

The current economy has many consumers watching every penny. Consequently, the value of a product or service must equate to more than just the money spent to purchase it. It must also bring with it an irreplaceable value that consumers can only get with that specific product or service. To stay ahead in this economy, businesses need to build that value by understanding customer needs and meeting them in a way that builds solid relationships and fosters long-term customer loyalty.

Value-based pricing is one way companies can demonstrate that they understand what their customers need and appreciate. In their recent book, Value-Based Pricing: Drive Sales and Boost Your Bottom Line by Creating, Communicating, and Capturing Customer Value, Harry Macdivitt and Mike Wilkinson highlight the importance of formulating pricing based on the perceived value a company's products and services offered to its customers, versus their actual cost, competitors' pricing, or market value. Value-based pricing helps companies focus on what makes their company stand out to customers based on their customers' needs and preferences, quantify those differences, and build a value-based pricing strategy. The ultimate goal is to communicate a brand's value to customers in a compelling manner.

"A focus on value is really a focus on understanding the actual needs of customers and finding a unique and differentiated way of meeting those needs effectively and efficiently," Macdivitt and Wilkinson write. "As soon as [companies] identify a unique approach or create a clever solution, it will be copied quickly."

Unfortunately, in a competitive market, imitation isn't the sincerest form of flattery; it's a nuisance and a detriment to future sales. Companies can use value-based pricing to differentiate themselves from their competitors, while providing products and services that truly matters to customers. Value-based pricing is more than offering a good deal. Consumers find value in their perception of a product (e.g., owning a Monte Blanc pen may make an executive feel more established than owning a Cross pen), an exchange (e.g., the pricing includes access to a special customer service hotline), or an economic enhancement (e.g., a private sale for high-value customers). No matter the benefit, customers spend more when they feel they're getting good value. Consistently good value also sets the stage for repeat patronage and customer loyalty by establishing a dependability that competitors can't replicate.

Macdivitt and Wilkinson cite three key elements of value-based pricing-revenue gains, cost reduction, and emotional connections-which they call the value triad. They help to derive meaning from an otherwise difficult-to-measure encounter. Revenue gains are the revenue that accrue to a customer as the result of the purchase and use of a given product or service. Cost reductions represent the money saved by using a company's given product or service. Cost reductions refer not only to a price reduction on the product or service itself, but also to an overall price reduction over the life of the product.

Revenue gains and cost reductions are more likely to create value for B2B customers, whereas the "feel good factor" of an emotional connection is what often triggers short-term sales and long-term loyalty among consumers.

Additionally, value, in terms of promotional pricing and the like, may intrigue first-time customers, but not necessarily entice and satisfy them to the point of return patronage. Consumers are more likely to build a long-lasting bond with companies and service providers that don't just offer value through discounts, but deliver value by treating their customers as individuals, as well. And B2B buyers will be won over for the long-term by revenue gains and cost reductions that last.

Value-based pricing is a way to combine the value triad and perceived value to create pricing that treats different customers differently and gains customer loyalty as a result. "A value-based approach generates lasting customer relationships that are more difficult to dislodge than relationships based solely on price," Macdivitt and Wilkinson write. "In this sense, product and service lifecycles reasonably can be expected to be significantly longer than those which are not based on understanding and delivering real customer value."

By tuning in to customers' needs, companies can learn how to better meet those preferences. By tuning in to competitors' capabilities, businesses can learn how to differentiate themselves from others in their industry. But by bringing sales and services to the personal level, companies will inspire loyalty for life, bringing more long-term business to a company than the occasional promise of a sale ever could.