Value-Based Pricing

Wake up: price does not equal value

Where willingness to pay and perceived value part ways, and what to do when they do.

Jan Y. Yang · pricinggoat.com

In the early days of my career as a pricing consultant, I was taught that price should equal value. I truly believed in that.

As I grew older (and hopefully wiser?), I started questioning the price-value equation.

Where price and value part ways

The reality is, there are at least a handful of scenarios in which the price a customer is willing to pay differs from the value they perceive in a product or service. For example:

I
Luxury aspirations vs. budget realities

A customer might dream of owning a high-end car, fully understanding its premium value, but they can only afford a base model or a competitor's lower-priced offering.

II
Perceived necessity

Essential products, like certain medications, might be highly valued for their impact on health, yet customers may resist paying the price due to financial constraints or lack of insurance coverage.

III
Experience gaps

A first-time buyer may not fully appreciate the value of a premium software solution and thus finds its price too high, while a seasoned user might find the price fair.

IV
Market dynamics

Competitive pressures can force companies to offer steep discounts even when the product's value clearly exceeds its price tag.

Customers may genuinely appreciate the value of what you're offering, but they may not be willing or able to pay the full price.

When the price falls below the value

So, what can we do about it?

One of my guiding principles is that the list price should still align with the value you believe your product or service delivers. This reinforces your positioning in the market and avoids diluting your brand. But to bridge the gap between price and perceived affordability, smart discounting can be a powerful tool. For example:

1.
Targeted discounts: offer promotions based on customer segmentation, such as first-time buyers, students, or loyal customers.
2.
Bundling: add complementary products or services to create perceived value that justifies the price.
3.
Time-limited offers: create urgency to drive purchase decisions without permanently lowering the price.
4.
Financing options: allow customers to spread payments over time, making high-value products more accessible.

Another approach is to educate customers on value. Clear communication about how your product solves their problems, improves their lives, or outperforms competitors can close the gap between perception and willingness to pay.

And finally, don't underestimate the power of innovation in pricing models. Subscription-based pricing, pay-per-use, or performance-based models can align perceived value with affordability over time.

So, what's the lesson here? Price and value might be like two friends on a road trip: they often travel together, but sometimes one takes a detour. The key is to keep them heading toward the same destination: a place where your customers feel good about their purchase and you feel good about your margins.

I still believe in the price-value equation, but it's less of a formula and more of a dance.

And sometimes, you just need to change the tune.

First published on LinkedIn, November 2024.

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