Value-Based Pricing Model
What Is Value-Based Pricing?
Value-based pricing (VBP) sets the price of your product, service, or experience based on what your customers are willing to pay. When successfully executed, profitability will improve due to premium prices paid by customers while maintaining customer volume.
Certain types of firms lend themselves well to the value-based pricing model. To help you discern whether this fits your business well, complete Activity 1.
Value-based pricing is not about taking advantage of your customer. It’s about building relationships with your customer base in order to effectively price your product or service at a mutually beneficial price. This educational guidebook and workbook companion will guide you through the process of determining a value-based price for your fitness service.
Click the Button Below to Download the Workbook Companion and Follow Along with the Instructional Steps Below!
Step 1: Focusing on a Single Segment
Customer segment: who is your product or service created for?
The first step is identifying your market segment.
The market segment for a small cycling studio is likely different than the market segment for a traditional “big box gym” like the YMCA. While both specialize in providing fitness services, the big box gym’s market segment is customers who appreciate the ability to set their own schedule and don’t require instruction past how to use the treadmill; yet for the cycling studio, its market segment is consists of consumers looking for attentive instructors and a cycling specific workout.
As your business grows and adapts to include new methods of delivering your product – say a fitness studio offering online or outdoor classes – be aware that your market segment may also move, informed by your (essentially) different product. Complete Activity 2 to help you better understand your “segment.”
Step 2: Determining the Next Best Alternative
What is the next best alternative for my product?
The next step is determining a market price. To do so, you must identify your business competitors.
For example, a small gym may compare with bigger gyms like YMCA or boutique fitness studios. While you might be able to answer this on your own, the best way to know for sure is to ask your customers. This brings us to Activity 3.
Step 3: Understanding the Uniqueness of Your Product or Service
Value-based pricing is all about putting a value on what sets your product apart from your competitors’ product.
Something to remember: your product is not unique simply because of your brand. The YMCA is not more valuable than Planet Fitness simply because of its name. Your uniqueness is derived from the special features and services that set your product or service apart. Use Activity 4 to help you with this step.
Step 4: Valuation of the Uniqueness of Your Product or Service
Exactly how much better is your service than your competitors’? Put a dollar value to the uniqueness of your product or service – the price premium.
Your customers will need to agree with this evaluation. If the price is too high you might lose customers, and if your price is too low then you’ll miss out on opportunity for revenue.
Once you determine your price premium, you might decide to charge this premium. However, remember to consider customer relationships and business reputation in setting prices.
Transparency is key in this step. Make sure your customers know why you think your product or service is special, and deserves a premium price – or be creative and convince them.
Activity 5 will help you work through this step.
Step 5: Pricing Tactics
Should you offer sales or discounts?
Pricing tactics, or any price change such as a sale or discount, can help you bring in customers who might have not otherwise spent money at your business. But you don’t want to just drop all of your prices. So below are a few ways you can offer sales or discounts to capture new customers without forfeiting too much total profit:
Group discounts for seniors or students
Hurdle method: offer coupons that the customer can use for a discounted product
First use discount: allow a customer to try your product or service at a discounted price. This could be especially useful if you have transitioned your services due to COVID and you want customers to try your new offerings. For example, a discounted first class at an online fitness studio could offer them a low stakes trial, which could translate into continued business.