Many companies and freelancers create great value but are not able to capture it. What they need is a value-based pricing approach. Learn how to customize a value-based pricing approach for yourself.
- Every business has to make pricing decisions. Whether you are a freelance photographer, a pharmaceutical company or Boeing, selling airplanes. Empirical research shows that too many executives and entrepreneurs use cost-based pricing, which means that they calculate their production cost and add a markup. For example, 100% to set the price. Let's take a restaurant as an example because you all know restaurants and maybe wonder how they price but also because I grew up in my parents' restaurant. I literally spent my childhood with my siblings at table 11. If you break down the total expenses for restaurant, you see that about 33.3% are direct costs for food and beverage, 61.6% are indirect costs, and 5% is the net profit margin. Based on these numbers, cost-based pricing would suggest that you take the cost of your food and beverage and triple it to define the price. Because three times 33.3% are very close to 100%. With this, you ensure that you don't spend more than 33% on direct costs. And with the rest, you can cover your indirect costs and secure a 5% margin. However, if my father did that, he will charge $24 for a hamburger and $4.50 for a glass of wine since the costs are $8 and $1.5 respectively. Clearly, that price would be too high for the hamburgers and too low for the wine, at least for most guests. My father learned from experience that guests are willing to pay $18 for a hamburger and $7 for a glass of wine. As you can see, the markup for wine is much higher than for hamburgers. This looks either unethical, unfair, or illegal. It's none of the above. The reason my father does not use cost-based pricing is that customers are willing to pay a higher markup for wine than for food. If he would charge $24 for a hamburger and $4.50 for a wine, he would probably lose his loyal guests, which would destroy his business. The keyword I mentioned above is willingness to pay, which depends on the value perceived. In other words, the more I value your product or service, the more I'm willing to pay. You can charge me less than I'm willing to pay, thank you, amigo, we still have a deal. But if you charge me more, I'm not buying. Let me take another example. Switzerland, where I'm from, is famous for its watches. Some people buy a Swatch for 50 francs, it tells them the time. Some buy an Omega for 5,000 francs, it tells them the time. Some buy a Rolex for 15,000 francs, it tells them the time. And some buy a Breguet for 180,000 francs. For that money, you can hire two people walking behind you to tell you the time. What this illustrates is that willingness to pay for a watch is very individual. And this applies to any other category.
- Creating, communicating, and capturing value
- Comparing value, not prices
- Segmenting customers
- Move from free to fee
- Handling discounts
- Strategically defining your price carrier
- Pricing psychology