The correct pricing strategy can make or break a business. As a small-business owner, your strategy dictates not only your profit, but the way your product is perceived. Value pricing strategies form a solid middle ground for many businesses, but the price must fit the products and services offered for the strategy to be successful.
What Is Value Pricing?
- Value pricing is a strategy that bridges the gap between economy and luxury. In value pricing, the consumer cost of a good or service is more than the sum of its parts, but still practical for everyday consumption. Economy pricing strategists use little markup and rely on volume to turn a profit. Luxury strategists choose higher markups to line up with costlier ingredients and high-end attention to detail. The value-priced product line falls somewhere in the middle.
- One of the major advantages of value pricing is positive consumer perception. When consumers are offered a range of price options, they gravitate toward the middle of the pack -- the value priced lines. Shoppers often see the least-expensive item as cheap or of lower quality than the others, while they tend to see luxury items as extravagant or too expensive. Much like "Goldilocks and the Three Bears," the middle products are just right. A value priced line assures consumers that they are making a purchase that is adequate but not overblown.
- While it is somewhat counterintuitive, value-priced product lines tend to be more resistant to economic downturn. Tough times mean people are watching their money more closely, but it also means that they are more interested in the benefit they get for their dollars. If your value pricing reflects real added value through additional services or features, that quality offsets the slight bump in price. In addition, those who chose similar, luxury-priced items are likely to drop down to the value-priced option in their own money-saving efforts.
- Value-priced products offer a superior profit margin to economy-priced lines, and this means greater profit for the same level of volume. Economy-oriented businesses must rely on high sales volume to make a profit, while value pricing removes some of the volume pressure from the equation, freeing the sales force to provide brand support through client care and quality, rather than price point alone.
- The key idea in value pricing is value -- the consumer must feel that he is getting a good deal. This means that the value-priced brand must offer features and benefits that justify the price beyond its components. This expectation forms an unspoken contract of trust between the consumer and the brand. If broken, this contract may be irreparable.