Value-Based Pricing Strategies to Boost Growth
Value based pricing is one of the more difficult strategies to pull off. To be successful, you need to do market research, check competitors, and understand your customers.
A perfectly thought-through pricing structure will help you scale your digital agency in a matter of months. At SPP, we’ll get into the intricacies behind value-based pricing and best practices that you can adopt in order to grow your business to the next level.
What is value-based pricing?
The value-based pricing strategy is when business owners and executives set prices for a product or service based on the projected value it uniquely offers to customers, as opposed to strategizing profit margins against the cost of production, labor, or historical and competitor prices.
Value-based pricing example scenarios
Since the price is a numerical evaluation of how much a customer values your offering, you need to consider what is most important to them. This, of course, will depend on your niche and offering. Let’s go over a handful of examples of this in action.
Say you’re a website design and development agency. If your prospect is looking for a simple placeholder for their brick-and-mortar company information, charging $5,000 might be a stretch. They won’t see the value in that.
But if you have a prospect whose business is more dependent on an interactive user experience with an attractive website (like an advertising agency flexing their creative portfolio to close big-ticket deals), they can appreciate the premium price tag that comes with your master-level Webflow skills and coding expertise.
Similarly, if you offer:
Video editing – determine the purpose of the video. If you’re creating or editing something strictly for brand awareness, it may not be as valuable compared to crafting a video to convert prospects for direct revenue. That’s why it’s important to sit down with the client and ask why they want what they want.
Graphic design – where will your creations be used? Is it for a simple blog post? One-off advertising campaign? Or is the company planning to rebrand their entire product line with your new logo design? Each scenario will respectively warrant a higher price tag because your graphic design becomes more critical to the client and their business.
Podcast creation – are your services aiding the client’s supplementary content marketing channel (e.g. ZipRecruiter’s “Rise and Grind” podcast)? Or is the podcast the core of their business (like Joe Rogan)? If your services have a higher degree of impact on the client’s revenue, then the client will want to feel like they’re hiring top-notch talent for the job – and you can make them feel that way with a premium price point.
Social media management – Most brands today have an online social media presence. But you shouldn’t base your rates on that minimum requirement. Ask questions about how the client wants to leverage their social media outreach. Do they want to just look alive? Build credibility? Is their community engagement crucial for recurring revenue? This tells you exactly how much they value social media efforts, and you can charge accordingly.
Reputation management – brand image is important to every company, obviously. But some companies will need a greater emphasis on credibility and trustworthiness – for example, organizations related to health care or finance especially cannot afford to lose face. Or production companies that make essential items. Evaluate the degree of importance of a good reputation for your prospect and start charging higher.
In the following sections, we’ll dive deeper into some actionable strategies for basing your prices on value and personalizing your offers for different customers.
Developing a value based pricing strategy
Why are experts charging too little for their services these days? Because
a) they’re trying to compete on price and
b) they use cost based pricing.
There’s no point trying to compete on price, unless you are the cheapest provider in the niche, bar none.
If you decide to go down this route, know that there will always be someone who’s willing to work for less.
Cost-based pricing means you set the price based on labor costs and materials. It works for Ryanair and Walmart, but certainly not for a small agency. Selling services this way is about as effective as a cat door in an elephant house.
On the other end of the spectrum are premium companies, such as Apple. Let’s discuss why they’ve chosen their pricing based on value.
Clearing misconceptions about value-based pricing
Value-based pricing may be incredibly popular in various industries, but many marketers have some big misconceptions about how the process works. Here are the top three:
Value-based pricing isn’t dependent on a customer’s willingness to pay for every product feature. You shouldn’t sum up the dollar value of every feature for a final price. Many competitors offer the same perks, the calculation can get complicated with too many features, and your customers aren’t going to consider every little thing either. Instead, focus on your differentiating factors and determine a customers’ valuation for that. For instance, a cold outreach agency could provide a pricing quote based on the projected conversions they (think they can) provide to their clients, as opposed to the number of emails they reached out to every month.
A brand’s value does not have to be a part of the value-based pricing calculation. Remember that a marketer should put a dollar amount on the differentiated features that add value. So maybe it’s something you can do faster by X%, or guarantee longer-lasting results for, or provide a fool-proof growth plan based on a playbook that’s worked well with most of your clients in the past.
Value-based pricing won’t work if competitors don’t reasonably price their product or service. You can’t completely ignore your competition’s pricing and treat value-based pricing as your main strategy to grow your business. Competitors’ pricing can influence how valuable consumers perceive a product to be. The hard truth is that if your competitors are charging much lower than your calculations and offer pretty much the same service, it will be hard to justify your higher prices. You’ll have to determine how you want to differentiate and whether it’s enough for the customer to pay higher.
The 5 advantages of value based pricing
While value based pricing is hard to set up, the long term advantages outweigh the disadvantages:
Thanks to a detailed competitor analysis, you’ll enjoy higher profit margins.
The competitor research can help you focus on more lucrative products/services.
You learn new things about your target audience, competitors, and the overall market.
Value based pricing is more strategic than the cost based alternative. This allows you to better plan your marketing strategies.
You’ll be able to accurately estimate the demand for your product/service which helps you create a proper supply channel, price and market it accordingly.
Naturally, there are also disadvantages to the value based pricing method:
Depending on your niche, the demand might be very low for your product or service. If new competition arrives, you’ll have to position yourself even better.
You’ll need to put a lot of time, effort, and resources into your value based pricing strategy. This is often an issue for those who are getting started.
This business method works well for small businesses who focus on a specific service or product. It’s very hard to scale for larger companies.
Value based pricing vs. cost based pricing
The value of a service depends entirely on the client, the size of their business, their niche, and their unique situation. Cost-based prices, again, revolve more around your business costs and stay true to a specific profit margin.
To determine how valuable your expertise is, you need to check what kind of clients are you working with:
Business owners who want to get noticed, but don’t know how
Marketers who know SEO basics, but can’t do it themselves
SEO resellers who work with the first category above
It’s a best practice to determine your pricing for a single segment of customers. The reasoning is simple: different segments of customers will have different perceptions of value toward your product or service.
A small business owner will benefit more from your experience than a reseller who’s looking for somebody to do the manual work. A reseller can buy a service for pennies on the dollar and sell it to the right client for a lot more.
Competition based pricing is a bad idea
There’s nothing wrong with checking out the competition. A competitor analysis is a good way of finding your way around a niche. However, you shouldn’t copy-paste a competitor’s price to your own offering if you’re not offering anything worthwhile.
While this might work in the gasoline industry, how are you going to set yourself apart with your content marketing offer? Unless you can outsell the competition with a good value proposition, your chances will be slim.
And that’s the reason why a bit of smart marketing combined with value-based pricing can help.
Determine the “next best alternative” that your specific target market would have if you didn’t exist. This will be the essential point of comparison for calculating a value-based price. Once you understand the differentiated worth of your product or service’s unique features to the customer, you can place a dollar value on it.
For example, if your SEO writing agency also offers backlinking services unlike other SEO services, then you can justify the higher-order value in your bundle. That’s the only competitor-based pricing strategy that makes sense.
Packages or custom quotes?
Our research has shown that the top ranked SEO agencies do not display their pricing online. We looked at agencies ranking for terms “seo agency” and ignored a few agency comparison sites.
These general search terms are bringing in a wide range of prospects: from individuals to big businesses. Naturally, they want to be quoting each client based on the size of their business and the value the client will be getting.
If you’re selling through a single medium (like forums), you can attract a lot of similar clients. In this case package pricing makes sense, because you can predict how much value your average client will receive.
Creating a sales funnel
Expensive services are often sold over the phone or in person. It makes sense to close them this way if the value is large. Clients need that extra attention, and at that price point you can afford to give it.
This is what we are doing at SPP as you can see on our pricing page:
We offer three different plans with a discount for yearly payments. Our enterprise plans are custom tailored, so we ask potential leads to either email us, or schedule a call.
This allows us to capture potential leads, research them, and create a valuable proposition. You can also use the opportunity to put leads into a sales funnel, and target them with automated emails.
Offering discounts to old & new clients
If you’re known for giving discounts left and right, people will always expect you to do so. These clients typically need excessive hand holding and are more trouble than they are worth.
Sometimes they even promise to bring you a lot of business if only you do this one gig for free. In clients’ eyes a free service is not as valuable as one they’ve paid full price for. This introduces a whole set of problems in the client-professional relationship.
One way around this scenario is to offer a free trial period (for recurring services) instead. Or, a cheaper one-time service that serves as a preview. It should be convincing enough that anyone interested in your service becomes a long-term client.
On the other hand, nothing prevents you from creating coupons for specific events that you can focus your marketing efforts on. Be it Black Friday, Christmas, or any other holiday–coupons remain a good marketing opportunity for any agency.
Instead, think about setting up a referral system through SPP.co. Those who bring in new clients will be rewarded. Depending on your setup, you can offer commissions on all sales, or restrict it to a certain period of time.
Create service bundles
As a digital agency, you know both your company and target audience very well. Analyze your current services, and think about a way to bundle them together.
Here’s an example:
Assuming you are selling monthly content marketing plans, why not offer blog writing and social media posts too? SPP.co allows you to design your order forms any way you like.
In the above example, a client can add extra services to their subscription if they are interested. Use the flexibility of order forms to also ask your clients a question. Identifying crucial pain points helps you offer better services.
3 psychological pricing methods worth trying
These are some pricing gimmicks you can test to give your conversion rates a quick boost. Here are some of my favorites.
1. Magic number pricing
The reason “marketing gurus” price things ending with 7 is because everybody else is doing it. It’s the industry norm and if you want to be associated with that industry, go ahead and price your services at $7.
If we look at the retail industry, the prices often end with nines or fives. At least there are studies supporting it (here’s one from MIT).
2. Round prices
According to this study, 42.9% of respondents believe round prices are more honest and communicate higher quality. This stands true for high ticket services, which are often priced at round numbers like $500 or $5,000.
3. Price Anchoring
When making decisions, humans have a tendency to rely too heavily on the first piece of information offered.
Most service focused companies seem to use the 3-option pricing strategy quite often–we use it too! The reason is simple, humans are wired to think in threes:
We order drinks in small, medium, or large sizes, and
Focus on jewelry made of gold, silver, and bronze.
In pricing we can use a first, higher price as an “anchor” indicating the actual value of a service. We can then show a lower price, which seems smaller in comparison.
Add one more higher level tier to your pricing grid. Even if nobody buys it, it’ll make other tiers seem cheaper in comparison.
Ahrefs shows on their yearly pricing page that the Standard plan is the most popular.
Once you start looking at the comparison table on the ahrefs.com pricing page, you’ll notice how good a deal the standard plan is.
Real-life value-based pricing examples in action.
Okay, we’ve gone through the strategies, now let’s see some real companies use the value-based pricing strategy to their advantage.
Apple – “Think Different”
First mover’s advantage with a bonafide smartphone system
A robust software ecosystem that seamlessly connects all Apple devices allowing for smoother, faster computer operations
The sleek, expensive-looking design and appeal of the phone build itself
All in all, they’re selling premium-built smart devices with ease of use throughout the entire workflow and entertainment experience. Apple recognizes the potential of this core value proposition and prices its products accordingly.
So when we buy Apple products, we feel like we’re subscribing to a truly professional standard of tech that can elevate our daily craft to new heights with powerful performance and faster results.
HubSpot – “Helping millions grow better.”
HubSpot develops software products for inbound marketing, sales, and customer service. They have different plans for different user segments, because like mentioned before, they understand that a one-size-fits-all approach won’t cut it.
The fact is that companies of different sizes have varying needs and value certain operational perks more highly than others. This is clearly reflected in their package features, where they also offer you to talk to sales, so they can understand customer needs even better:
VS24 – Virtual home staging
At its core, the professional photo editors at VS24 chose to serve a specific target market of high-end realtors. They don’t do weddings. They don’t do graduations. They don’t do Instagram models. They focus on doing a really good job for realtors and making their listings look pretty, immersive, and realistic.
Their main value proposition is quick turnarounds and a 3D home staging experience. VS24 considered a couple of things:
They know realtors are busy with client inquiries every day, so they can’t afford to wait a week for media production. VS24’s clients thereby value quick turnarounds for photo edits.
They also know that realtors in the age of social distancing are struggling to properly show homes in person. So their clients value an immersive virtual home staging experience that can compensate for the limitations.
And, they know that their target realtors have multiple large listings, so it wouldn’t make sense to charge absurdly high prices for photo edits per room, as it would quickly add up to an unsustainable price point.
As a result, they catered their offering to address these problems exactly, and after some additional research, priced accordingly:
As you can imagine, it wouldn’t make as much sense for VS24 to base their profits off, say, their Photoshop subscription or hourly costs. Instead, they productize their services and evaluate price on how important realtors value certain things like fast delivery, quality of the result, reliability (reviews), and bulk affordability.
The main takeaway – charge what your service is worth to the client not how much labor it requires on your part. Learn who is buying your services and how much value they’re getting out of them.
If catering to a broad market, price projects individually. Use package pricing in narrow markets. Avoid pointless discounts and try to work with people who value your expertise.
Pricing things with sevens can make you seem like one of those fake “gurus”. Nines are a safer bet, while zeros communicate high quality and fair pricing.
Ultimately, don’t do things just because everybody else is doing it. Do your tests and blaze your own path.