The gold standard of value-based pricing is to set prices based on the value created by the items for the customer and the resulting price acceptance. However, this approach results in difficulties:
#1 A practical problem:
You can determine price acceptance empirically for only a few products. This is hardly possible for assortments with hundreds or even thousands of products. An analysis of previous transactions can help but will only ever find those pricing margins that have been exploited in the past and is therefore blind to possible future potential.
#2 A conceptual problem of value-based pricing:
The assumption that the value of a product is an absolute property inherent characteristic of the product does not stand up to the reality test. The same piece of clothing appears more valuable at a designer boutique than at a discount store. The same is true for price: If you show your customer a product, he is not likely to be able to tell you what he would be willing to pay for it. Have you ever seen a piece of clothing in a shop window and been able to precisely say what top price you would buy it? Rather unlikely. It is more likely that once you see the price tag, you will be able to tell whether you want to purchase the product or not.
The value-based approach is not wrong, but it falls short because it attempts to set the price based on willingness to pay (“What is the customer willing to pay for a product?”), which does not exist (as an absolute construct in a vacuum). The willingness to pay measured in this way is to be interpreted less as price acceptance than as price expectation (“What is an expectable price from the customer’s point of view?”).
Behavioral pricing closes this conceptual gap by focusing on what price customers would pay in a specific decision situation (“Would the customer buy the product, in this situation, at this price?”), and gives recommendations on how this choice architecture (e.g., the layout of products on the shelf or on the website) should be designed to develop price acceptance among customers.
Here, you can read why price acceptance is the better metric for your pricing strategy than the willingness to pay.
This is why you cannot and should not price all products based on value or price expectations
Depending on the role of price in the customer decision-making process and the functions of the product in the decision architecture of your product range, it may well make sense to deliberately underprice or overprice items (i.e., in deviation from the subjective value or expectations of customers). This is how you can distinguish the following types of products:
Bestsellers should actually be priced based on value or according to the customers’ price expectations and serve as a reference for other products. For example, the regular full-fat milk at the supermarket, the power socket at the electronic wholesaler, and the mid-range model in the automotive sector.
Highlight items that convey the supplier’s brand positioning that should be priced according to the supplier’s price image. These include, for example, the organic milk from free-range cows sold at the organic supermarket, the quality tool sold by the electrical wholesaler, or the sports sedan sold by the premium automobile supplier.
Promotional products that customers would not have bought spontaneously without the promotion (due to lack of attention or perceived advantage) can also be priced below value or price expectations. For example, the bulk carton of UHT milk at the supermarket, the gas grill at the electrical wholesaler, or the interior kit from the automotive supplier
Slow-moving products at the top of a category that are deliberately priced above customers’ price expectations or significantly more expensive than related skim products so that the skim products appear cheaper. For example, the Demeter free-range milk at the supermarket, the high-end fibre optic cable at the electrical wholesaler, or the top-engine sports model from the car manufacturer.
Items purchased infrequently and out of urgent need. Customers have little idea of the price of these products and pay little attention to the price because of the urgency, so the price can be set relatively high. For example, the lactose-free milk at the supermarket, the fibre optic cable at the electrical wholesaler, or the dog guardrail from the automotive supplier.
Additional features for service providers:
If it is not just about selling products, but about regularly used services (e.g., in the form of subscription), then—depending on the point in time in the customer relationship—there are further additional functions that you can use:
They are mainly free products that include only the basics of the offer. Like promotional products, acquisition products get customers to take the first step into subscribing. They are helpful if customers would not have taken this step without the acquisition product. The product’s main task is to attract new customers. For example, a trial subscription to a newspaper.
The customer relationship does not end as soon as the customer makes the first payment; the relationship must be nurtured from that moment on. Since the benefit of the service model comes from usage, you must ensure that the customer tries out the product and uses it regularly. For example, by making the daily newspaper available on all end devices or making articles available as podcasts. Read our article “Pricing & Selling for Subscription Models.”
Trial products allow users to test the enhanced product beyond the standard features for a limited time. The aim is to get them excited about offers in this way, the value of which they can only see by trying them out. For example, a one-day pass for a trial.
Customers who use the everyday product consistently and are excited about trial products can then be offered more products to draw them into higher-priced offers or options.
Whether you are selling traditional products or services, you should move away from the pricing delusion that all your products have to be blockbusters. Instead, you should put together your pricing like a good soundtrack. The point is not to create as many loud notes as possible, but rather to create the perfect interplay of loud and quiet that results in a good melody, which—without being able to explain it—pleases many listeners.
Pricing as a holistic task is not about designing isolated prices but rather about creating meaningful relations between prices. As a result, the task will become easier and more profitable. Please feel free to contact us directly for an individual consultation. Just send us an email to firstname.lastname@example.org or a message via our contact form.