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Understanding the Art of Value-Based Pricing: A Beginners Guide

Pricing is one of the toughest challenges that companies face when launching new products. We all have a tedency to price our products too low, perhaps out of fear that people won’t buy them. Yet, millions of consumers around the world purchase things that can only be described as expensive (relative to their cost). I’m talking about your $6 dollar coffee or a $300 t shirt. What are these companies doing that allows them to sell normal products for such as high price?

What is Value-Based Pricing?

These companies understand very clearly about value and what a consumer is willing to pay for that value. Take a moment and think about why people purchase your products. You are most likely solving a problem for them or you are adding value to their lives. Either way, your products provide a positive experience for your customers.

Focusing on the value of your products and then pricing accordingly is the foundation of value-based pricing. This is the opposite of simply looking at how much something costs to produce and then simply setting a price that is higher than this number.

Think Problems First

Thinking about the value that your products provide is a great way to start thinking about pricing. To do that, you need to understand your customers and their needs. You might never understand your customers completely but you can get pretty close by asking the right questions.

Let’s look at a few questions to get you started in this task:

  • What problem are you solving for your customer through your product?
  • What were they doing before they got your product?
  • How much time or money are they saving by using your product?
  • What alternatives do they currently have?
  • What other similar products do they buy?

Convert Everything to Dollars

Now try to calculate the total value that you’re adding to your customers. If your products solve a problem, how much is the solution worth to them? If your products provide happiness, how much would that be worth? Try to convert all of these benefits into dollars to give you a starting point for your pricing.

Once you have some dollar figures, you can start to look at possible price points that will make sense. You will also have to consider competitors and what current alternatives cost but the value your products provide should always be the starting point. Finally, remember the pricing doesn’t have to a one time activity. You can constantly update your prices as you learn new information on how your customers are using and benefiting from your products.

An Interesting Case Study

Let’s put everything into action by looking at one case study. Two designers created and started selling an ebook in March 2012. A complete case study was covered by Nathan Barry and it’s an interesting look into how pricing can have a huge effect on your sales.

One person sold their ebook for around $3 while the other sold theirs for $39. The first price point had close to $7000 in total sales from 1500 customers. The second price (the $39 one) had close to $9000 in sales from just 242 sales. We can see a difference of $2000 with a much lower number of sales. You can read the complete case study here: http://blog.asmartbear.com/selling-ebook.html

Both ebooks provide the same value and the data shows us that a small subset of people were willing to pay up to $40 for this information. Pricing your products according to value can be an automatic filter that can help you find the right type of customer.

The important to take away from this case study is that pricing low is not always the right option. Is it easier to support 250 customers than 1500? Probably. If you’re shipping physical products, you probably prefer to ship less products and make more money. All of these things will have an effect on your price.

At the end of the day, focus on the value your products provide and price accordingly. Do you have any other tips around pricing e-commerce products? Let me know in the comments.

Ruben Ugarte is a Web Analytics Consultant who has helped companies of all sizes grow through the use of analytics. If you have any questions around how you can use analytics or even how to use tools like Mixpanel or Segment, get in touch with him!

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