What is Value-Based Pricing: How businesses Can Take Advantage

As a business owner, pricing your products or services to sell can be a daunting task.

It might be something you set long ago, and tweak to adjust for inflation and costs every once and a while. Many business owners don’t make time for or consider revising their pricing strategy.

You probably don’t think about it every time you ring up the total on the register and pass the credit card machine to the customer, but so many factors go into that little number on the screen before accepting payment.

Garth Watrous, a Second Generation Owner at American Hat Makers (AHM’s) out of Watsonville, California, took up his father’s hat business just five years ago and has been using value based pricing to price his hats. His father, Gary, began crafting and selling leather hats out of his Chevy station wagon in the early 70s.

Today, you can find every kind of hat on the market, from cowboy hats, straw hats, felt hats, and even “Hats for Big Heads,” all listed in his online store and priced according to their value.

After spending four decades honing their family craft, learning the intricacies of the hat industry from a young age, and perfecting their handmade techniques, it’s no surprise that most of AHM’s hats can fetch prices ranging from $90 to $300.

And for those with a taste for rattlesnake leather, the price tag can go up to nearly $500.

“Most consumers understand each item's actual value and pay accordingly.”

-Garth Watrous

In other words, people are willing to pay.

With fast-fashion brands like Shein selling hats for $8, it’s no small feat being able to charge nearly 38 times as much for a clothing accessory. Perhaps, as research on millennial spending habits suggests, people will fork over more dough for higher-quality products and lifetime warranties on their handmade fedoras.

That would echo similar trends, such as the popularity of raw Japanese denim and consumer habits geared towards sustainable and ethical brands.

It’s not just being used in retail, though. Value-based pricing is taking flight across many industries, including accounting firms, who are putting their spin on this new pricing strategy.

So what is this new pricing model, how does it work, and is it a good fit for your business?

What is value-based pricing?

You want to make sure that your prices are competitive, but you also need to make a sustainable profit. One pricing strategy that is gaining popularity is value-based pricing. Instead of setting a price based on your costs, value-based pricing takes into account the value that your product or service provides to your customers- and a surprising number of customers are embracing it.

That doesn’t mean letting your ego determine your price tag, but it does take into account aspects such as experience, quality of work, and setting a value that enables you to compensate staff fairly whether in regards to wage, benefits, workload, and other aspects that allow you to retain talent and continue offering your services sustainably.

Benefits of value-based pricing include:

• Higher profits
• Taking into account the real cost of expertise, materials, time, and effort
• Attracting customers that align with your values and are not only willing to pay for a certain quality of service or product but may be exclusively consuming these types of goods or services.
• No more underselling
• The cash runway to invest in retaining talent and investing in future tech, education, training, materials, and equipment

For American Hat Makers, Watrous says, “value-based pricing efficiently increases your brand value by prioritizing customers' interests first.”

For his retail business, increased profits from value-based pricing meant they have the capacity to invest in quality materials and workmanship, offer a lifetime guarantee against any defects, and continue to make the products locally rather than outsourcing.

And better products speak for themselves apparently. “Since implementing value-based pricing in our retail model, we have witnessed a surge in the number of customers,” adds Watrous.

How does value pricing compare to traditional pricing models?

There are several different pricing models available to businesses looking to price their products or services— so which is best?

The most common pricing models include the following:

• Hourly
• Cost Plus
• Flat Rate
• Value pricing

Hourly pricing

Hourly pricing is a pricing model where the customer is charged an hourly rate for the total amount of time that is spent providing the product or service.

It is a common pricing model for consultant work, home services such as contractors, or even legal and accounting work, where the amount of time required to complete the work can vary.

Since some jobs are quick fixes, some businesses will charge a minimum of one or 2 hours to cover their travel expenses or lost revenue from turning down other jobs, for example.

While hourly pricing is straightforward for both the business and the customer, customers are wary of dragging out jobs or withholding information and offering band-aid fixes to create more work and future income opportunities.

However, a few advantages of hourly pricing include the ability to control how much time you invest into a project or to gain a competitive advantage for more clients by being able to sell your services cheaper (although likely at the cost of burnout, working faster, delivering a poorer product, and even engaging in unsustainable pricing wars).

Besides, it may not reflect the true value of the service provided. A 5-minute job may be the result of years and years of experience. You might be saving a customer numerous visits and jumping through hoops to get answers or fixes they might otherwise have to. Most customers are willing to pay for a job done well the first time around, even if it is a bit more costly upfront. (After all, time is money too.)

Cost plus pricing

Cost plus pricing is a pricing model where the customer is charged the cost of producing the product or service plus a markup. Sort of like Interchange Plus pricing, where the wholesale rate is passed onto the merchant with a small markup for the seller to make a reasonable profit.

If your business has a good grasp of its cash flow and internal costs, this pricing model can be easy to calculate. This method helps ensure you deliver a fair and sustainable price while remaining competitive. However, while this covers basic costs and is noble in passing on the lowest price to your customers, it may not reflect the product's or service's "true value." It can lead to price wars with competitors, and you might be unable to afford growth opportunities or invest and retain your talent and products.

Flat rate pricing

Flat rate pricing is exactly how it sounds. Regardless of the time, resources, or extent of a job, a flat rate is set and charged for a specific product or service.

Flat rate pricing is a common pricing model for businesses that offer services such as cleaning or repairs, where the cost of providing the service can be estimated. Aside from those one-off college party clean-ups or evictions, you can usually estimate the cost of a job. You might charge a flat rate per room or floor, for example.

While a flat rate is easy to understand and calculate for both the provider and customer, there are instances where a customer is overpaying, or a business is underselling. It can be difficult to adjust if the amount of work required varies.

Is value-based pricing right for my business?

The key to determining your pricing model may lie in understanding your customer's needs and priorities. What is important to them, and what do they value most?

Here are some points to consider; these will help you to identify the benefits that your product or service offers and how it aligns with your customer's priorities.

• Determine if your customers are bargain-driven or if they prioritize quality and convenience (think fast food vs. a hearty home-cooked meal).
• Identify the pain points that motivate customers to seek out your business.
• Consider what your customers care about outside of your products or services.
• Do a little research on your customer habits. Look at your sales data, or explore any demographic or psychographic factors that may impact your customer's decision-making.
• Use this information to build a profile of your ideal customer.
• Tailor your products, services, and marketing strategy to better meet the needs of your target audience.

These are just a few factors to consider when choosing the best way to price your products or services. However, with these benefits in mind, it might be worthwhile to dust off your pricing catalog and take an honest look at the real cost of inventory, time, and experience and the inherent value to your customers.