Should Pricing be based on the value it creates?
Alrick Dorett
| CFO, Asia | Driving Financial Stewardship with Financial Success | Not your typical CFO | Be Better than Yesterday |
Pricing is a key determinant of business success. Pricing is the process of setting a price for goods and services to achieve an objective, which is ultimately to achieve a profit.
There are several different approaches to pricing which depend primarily on the goals of the organisation. Different industries have different pricing models due to the different objectives they are trying to achieve.
Pricing strategies can be divided into four main categories: fixed, variable, marginal and perceptual (value) pricing.
"Value is the most important thing you can offer your customers." - Bob Parsons, Founder of GoDaddy
A price is set in each situation to ensure that the organisation earns sufficient revenue to cover the costs of producing and selling its products. This is important for both businesses and consumers because businesses need to earn a profit to stay in business, while consumers need to have information about the prices of goods to make informed purchasing decisions.
Likewise, a service provider also needs to be able to make a fair profit to cover their costs while providing a high-quality service to their customer.
For example, a hotel charges its customers per night to cover the costs of running the hotel and providing service to its guests.
It does not only charge the cost of operating the room. The costs of providing accommodation, housekeeping, food and beverages must also be taken into account and charged to the customers.
"Price is what you pay. Value is what you get." - Warren Buffett
This is critical for a business to be successful since it ensures that they earn a profit to stay in business and continue serving its customers.
Similarly, a professional sports team such as Liverpool charges fans for tickets so that they can cover the cost of hiring the team and the stadium in which they play.
But should a service provider share in the benefit of their client's success or should a service provider's price be based purely on how much it cost them to provide the service?
"Pricing is not about cost plus, it's about value." - Rafi Mohammed, pricing strategy expert
In other words, should service providers charge their clients based on the value of the product or service they are providing?
The answer should be Yes!
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When determining the right price for a service or product, we need to take into account the cost of production and the expected return on investment to determine a fair price for our products and services.
Value-based pricing is the practice of charging a fee that is relative to the value and benefits of the product or service being provided to the customer.
"Value pricing is not about charging the lowest price, but about charging what your product or service is truly worth." - Ramit Sethi, personal finance expert and author
Why?
This will allow the service provider to invest in the necessary talent and equipment required to provide a high-quality product or service that will ensure client satisfaction and repeat business.
1) Value-based pricing allows service providers to focus on improving quality and driving value for their customer. They will be able to provide a superior customer experience that will differentiate them from their competitors and ultimately increase customer loyalty.
2) It encourages customers to pay a fair price for the high-quality service that they receive. This ensures that everyone wins and the service provider can continue to provide excellent products and services to their customers in the future.
In an environment of inflationary pressures and rising cost of talent, service providers may need to regularly review and adjust their pricing strategies to stay competitive and maintain profitability.
This may involve implementing value-based pricing, which focuses on the value provided to customers rather than the cost of delivering the service.
Additionally, service providers may need to explore ways to increase efficiency and reduce costs in order to offset the impact of inflation and rising talent costs. This could include using technology to automate processes, outsourcing certain tasks, and finding ways to retain and attract top talent at competitive salaries.
Ultimately, services firms in this environment need to strike a balance between providing value to customers and maintaining profitability in the face of rising costs.
"Value pricing is about understanding your customer's needs and charging a fair price that reflects the value you are providing." - Neil Patel, digital marketer and entrepreneur
Value-based pricing establishes a fair exchange between the customer and the service provider and encourages both parties to be satisfied with the outcome of the transaction.
Thoughts?
END
Alrick?has been in the advertising industry for the last 27 years.?A CPA by trade, he is currently the COO of TBWA Singapore and Malaysia, and the Chief Pricing Officer for TBWA Asia.?Alrick has been part of the transformation team and operationalising those outcomes with the companies that he has worked for. His interest lies in incorporating technology into businesses, B2B pricing, and coaching and mentoring start-ups and troubled businesses.
Curious Mind | Brand Builder | Passionate
1 年Yes, but - value is subjective. And that’s why it’s challenging to justify many of the times. Primarily functional minds work of justification by the numbers, while primarily emotional ones work with perception of added value. Surely there’s a balance to be found by exploring both angles.
Experienced International CFO Driving Financial Excellence & Strategic Growth | Expert in Financial Analysis, M&A, Risk Management | Leading Cross-Functional Teams for Profitability
1 年Great piece Alrick Dorett