Pricing Based on Perceived Value or Differentiation

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Pricing Based on Perceived Value or Differentiation
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Every manager knows, even intuitively, that for your business to thrive, it needs to bring something new to your market. In other words, that means she needs to be different and innovate to stand out and win the customer buying decision.

In many cases, this is clearer in the values ​​that the company can charge and the pricing that it can exercise over time with its customers. In the end, why do you think iPhones are so more expensive? Is it just cost of production? To demystify this, we will analyze in this post the cases in which the pricing is based on differentiation.

See also: Complete Pricing Guide

What is Pricing?

The activity of pricing or pricing involves defining mathematical and also strategically, viable pricing and the method of charging for your products or services. In general, the issues involving pricing are fixed costs, variable costs, definition of contribution margin e point of equilibrium, Competition Analysis and positioning.

What is Pricing and How to Calculate Selling Price?

If you are interested in pricing, we have an article about What is pricing?

How to Differentiate?

Differentiating and innovating is not trivial. Precisely because of the challenge involved, many researchers and management professors have been trying to create simple application methods so that entrepreneurs can critically appraise their business and come up with new products and services that allow the practice of value-based pricing.

In this context, the best tool we have value curve, presented in the book "The Blue Ocean Strategy". It is a suggestion of a simple chart that will help you create a unique and differentiated value offer. The exercise, as shown below, is: on the Y-axis, list your competitors and on the X-axis, list the value attributes your customers evaluate when deciding your purchase.

Pricing Based on Perceived Value or Differentiation

Then, you will score each attribute (it can be from 1 to 10), to generate the value curve of each of the competitors. In the case above, it is clear that Ringling Bro and the regional circuses deliver exactly the same value to the customer, only on a different scale. That is, although they have different positions (premium vs economy), the general proposal is the same.

Cirque du Soleil completely changed the logic and differentiated itself, ignoring the attributes of value "Astros circenses", "Spectacles with animals" and "Several stables"; and adding totally unique values ​​like "Theme," "Refined Environment," and "Artistic Songs and Dances."

How to Price Based on Perceived Value

This pricing model takes more into account the customer's situation and vision than the company's internal attributes such as production costs. Before proceeding, to be clearer, let's just remember the 5 classic pricing steps:

  1. Cost Raising
  2. Point of Equilibrium Analysis
  3. Business Model Definition
  4. Competition Analysis
  5. Positioning and Strategy

When pricing based on perceived value, you will practically ignore the 1 and 2 points, because although they are interesting to know, what will matter much more are the 3, 4 and 5 points. That is, what will make the difference is you understand how your client sees you and how much he is willing to pay.

Let's take a very simple case to illustrate. Imagine you are a key chain and, as a good practice of transparency, you leave all your prices tabulated and displayed in the store.

  • Key copy: $ 20
  • Key copy (search and submit): R $ 50
  • Lock exchange: R $ 50
  • Lockout outside of business hours: R $ 150

Did you get it repaired? There are two very nice phenomena in the pricing of this keyring:

a) Differentiation and Innovation in the key copy service. When he sets out to increase the convenience attribute to the customer, he can charge more than double the same service! In this case, it is irrelevant, for example, that the cost of freight is R $ 10, because its profitability has risen a lot and probably the competition is much smaller than the common service of making key.

b) Perception of value in services outside business hours. In the case of the lock exchange outside of business hours, you will surely find a customer desperate for not finding any other locks open to assist you, and will see value and be willing to pay 3 times the base value of the service just to be attended to.

Problems in Forming Your Price According to Perceived Value

Of course, the above case demonstrates the best scenario of all, in which you took advantage of the opportunities and this did not have any negative effect. However, there are some essential precautions when pricing according to the perceived value method:

  1. Understand your customer: This is the most important point. Many times we assume that the tastes and the way of deciding the customer is the same as ours and we shoot the breech. Make sure, through conversations and tests, that the customer is deciding to buy from you for the reasons you think. It never hurts to understand what the competition is doing and how they are making their customers happy.
  2. Make gradual tests. Because it is much more emotional than financial pricing, you have to understand, through testing, how far your customer is willing to go. That is, translate these feelings into numbers. How much is a customer willing to pay for a lockout outside of business hours? Does this vary by city region?
  3. Be friendly. In some cases, such as the key exchange issue, it may seem that you are simply wanting to take advantage of someone else's emergency. So always be understanding with the customer, especially if you are testing whether a new pricing makes sense. Sometimes it's worth charging less so as not to ruin the relationship with the customer.
  4. Do not forget the finances. This is a powerful method that has the potential to increase your earnings considerably, but it does not rule out the need for thorough monitoring of your costs and pricing as a whole.

Conclusion

Pricing based on perceived value or differentiation aims to dramatically increase your earnings because it focuses on how much your customer is willing to pay rather than how much you are willing to receive. The more you know your customer and have different products and services, the more money you can earn and grow. If you would like to price professionally, see our spreadsheets to calculate your selling price.

What is Pricing and How to Calculate Selling Price?

Excel Spreadsheets

2 COMMENTS

  1. Do you have any content about pricing services for engineering projects?
    Needing to elaborate my monograph.

    Very good content by the way, I've already noted what you've been through.

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