Value pricing is used by businesses offering value at a low price. Is the relationship between real and perceived value important in building price strategies?
What do elastic demand and inelastic demand mean to your pricing decisions? Use a sales plan template to define marketing mix strategies related to price and product or service.
A value pricing strategy is when businesses offer a fairly high quality product at a relatively low price. The value has to be believable and accepted by the customer; you can't just slap a high quality label on your product and price it well.
This strategy is quite different from perceived value, where businesses using that strategy don't consider cost, rather they consider the customer's perception of product value.
With perceived value, the marketing mix elements are used to build the product's high value in the market. A focused promotional program, products that are well positioned and strongly differentiated, and a successful placement program are necessary marketing mix elements to support either value pricing or perceived value pricing.
Pricing decisions always need to be considered in the context of marketing mix strategies (marketing mix is product, price, promotion and place/distribution). Additionally, you need to have an understanding of price elasticity: what is elastic demand and what is inelastic demand?
What is Elastic Demand? Consumers will only buy the product at a certain price point (or within a narrow price range). Business owners must be careful in raising price - consumers are price 'sensitive' - and won't buy it they think the price is too high.
What is Inelastic Demand? Demand for a product is inelastic if consumers will pay any price for the product (demand is more important than price). A price increase will not hurt demand for the product.
As much as business owners would like to control price, the reality is that the marketplace controls price.
What it is:
This pricing strategy is based on offering customers high value at a low price.
Why and When to use it:
Businesses using this strategy often re-evaluate their pricing on brands (after losing market share to more generic-type products). Pricing for established brands has historically been higher than generic brand pricing however as the brand moves through its product life-cycle into the mature or declining phase, this pricing strategy can extend the life of the product.
To effectively use this strategy, it is necessary to re-engineer the manufacturing process to really find more economical ways to produce the product at a lower cost. This re-engineering usually only comes after the product has been in production for some time. Review your business operations plan to focus on gaining efficiencies that impact costs.
To gain more sales for this product, the quality and the features and benefits of the product must be retained. Do not cut quality to cut costs. Customers will recognize a lower value product; ensure that your product positioning and product differentiation are sustainable when using this strategy.
If you have a business in the retail market, a variation of pricing is the everyday-low-price model. This model has been successful for both large and small retailers providing the market believes that your price is low or the lowest. If you use this model, your promotion and advertising budget in your marketing mix strategies must focus on creating strong marketing mix promotion messages for targeting your market.
My advice: don't start with this strategy but build up to it as you add products or services to the line. When you see that all products in your line are being valued (and purchased), then build a value package and sell the package at the perceived value price.
What it is:
This price setting strategy is used by businesses which look to the market, and market demand, to build price.
If the market believes that the perceived value is high, the market is willing to pay the higher price.
Why and When to use it:
If you have a series of products in one product line offering that each strengthen the other and that offer your customers a total solution, this strategy can work well for you.
Your pricing would reflect the value that customers feel the whole package or line is worth, rather than one product alone. Ensure that you consider other products in your marketing mix product program when building this strategy.
The most important aspect of gaining acceptance for this pricing strategy is that you must determine the market's perception of the value of your product(s) correctly.
Assess these pricing strategies as you build your sales plan (and utilize a sales plan template to run scenarios for the impact of pricing decisions on sales). Both of these strategies (value and perceived value) sound similar, yet are quite different in intent and execution.
Return from Value Pricing to Pricing Strategy for a number of other pricing techniques to review.
Find alternatives to standard Pricing Methods.
For more on pricing policies, consider other Pricing Strategies.
Or return to More for Small Business Home Page.
Pricing is the foundation of your business success.
Interestingly many businesses focus on either building their price structure by using costs as the basis OR by using market information (that is, what the market will pay).
The reality is that the price needs to be constructed with both costs and market forces as part of the consideration. Additionally, the product or service value (ranging from commodity to luxury) plays a role in price strategy.
Building a strong pricing program is part of your marketing mix activities (product or service; promotion; place or location; and price). Many businesses focus most of the marketing attention on developing the product or service program and then promoting it; make sure you give price the time and attention it needs.
Businesses need to be more aware of the power of competitive and comparative markets than ever before.
Because technology and the internet makes pricing information available 24 hours a day, 7 days a week.
Customers use their mobile phones, laptops and even desktops to price check and compare.
The speed of pricing changes makes this an urgent action item for all businesses.