Value Based Pricing (VBP)

Please read Value Based Buying prior to reading this post.

Value Based Pricing (VBP) is about setting a price to capture the value that a potential customer receives.  If you understand the post on Value Based Buying, then it will be simple to understand why Value Based Pricing makes sense.

Here are the steps:

  1. Identify your customer’s second best option.  If your customer won’t buy your product or service, then what would he or she choose?
  2. Determine the price of the second best option.
  3. List all of the ways that your offering is better than the second best option.  Estimate how much you think these differences are worth to your customers?
  4. List all of the ways that the second best offering is better than yours.  Be very honest here.  How much do you think these are worth to your customers?
  5. Your calculate price is the price of the second best option (item 2 above) plus the value of your advantages (item 3) minus the value of second best option’s advantages (item 4).

Price = Item 2 + Item 3 – Item 4

All customers are different, so which one do you think about when doing this analysis?  Choose a customer that purchased from you and do this analysis.  Then choose a customer who didn’t buy from you (harder to find to talk with) and do this analysis again.  Customers who buy from you and those who don’t value your offering differently.  This is especially true for your advantages and disadvantages.  As a marketer your target market should be the customers who value your advantages.  Hence, you should price for those customers.

IMPORTANT:  This does not give you the “Right” answer.  This gets you close.  This let’s you see how your customers are making decisions, and creates a calculated price so you can see if it makes sense.  Eventually, you have to tweak this price up or down based on your judgment and experience.  If you are trying to reach a broader market, you may want to reduce the price.  However, a better strategy may be price segmentation, which we will discuss more later.

Don’t skip this step.  Even if it gives you the same price range you are currently using, it forces you to think about your customer’s decisions process.  This is valuable to you.

Action:  Use the 5 steps above to calculate your VBP for one of your most important products.  Use the information you gathered earlier when talking with your clients.