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Value Pricing: Why Do It?

Posted by Darrin Fleming on Apr 5, 2018 11:30:00 AM
Darrin Fleming

Value Pricing Why Do ItAs we discussed in the first post in this series, Value Pricing: What to Avoid at All Cost, there are many different ways to set the price of your offering, including cost-based, psychological-based, and market-based pricing. Now let’s look at value based pricing and why it is the most effective way to maximize return on investment from your offering.

The goal of value based pricing is to leverage the value that your offering creates for customers in order to maximize its earnings impact for your company.

What exactly does that mean? You might think the way to reach that goal is by raising the price that you charge. Or you may focus on increasing your margin for a particular product. Both approaches have potential, if you do it right.

Let’s look at these factors more closely to make sure you reap the full benefits of value based pricing.

Optimal vs. Higher Prices

Will a higher price lead to higher profits? Maybe, but certainly not always. Basic economics tells us that a higher price has the potential to lower market demand, thus reducing sales and negatively impacting revenue.

Also consider whether your offering is easy to replicate and how well it is protected through patents and other forms of IP protection. If inadequate protections are in place, high prices will likely lead competitors to copy what you’ve done and sell it at a lower price.

Even if your offering is well protected, a high price may encourage your customers to develop an alternative way to solve their problem. Remember, the goal of value pricing is to determine the optimal price to impact your earnings, which is not necessarily the highest price.

The Importance of Balanced Margins

Maximizing profitability is a nuanced endeavor. If your company has more than one offering, it’s important not to tweak the profitability of any one offering in a vacuum. You must consider how every pricing and margin decision impacts the sale of other offerings.

If you charge a high price with a high margin for a new offering, you may be perceived as taking advantage of your position with existing customers. Even if they buy the new offering at the price you set, they may choose to take their business for other less differentiated offerings elsewhere. Is the margin from the new offering enough to offset the potential loss of other business?

Value based pricing focuses on maximizing the earnings impact across your entire business, not a specific product line. Keep this in mind when considering how to increase your margins.


Using the value that your offering creates for your customer enables you to set a price that captures a significant portion of that value while still giving your customer an economic incentive to buy.

The next post in this series will discuss the mechanics of how to determine price based on value.ROI Selling- Price Discounting

Topics: Value Pricing