In the past, individuals and companies often relied on cost-plus pricing to set their rates. This method involves calculating all costs associated with developing and delivering a product or service, then adding a desired profit margin to get the price.
In contrast, what gets people to buy is the perceived value they have of the item they are considering purchasing. Rarely will someone consider the cost of production and delivery especially when it comes to services.
Things have changed. Today, the internet offers abundant access to customer data. So more people and companies are setting their prices by using customer-driven pricing.
This is the second article in a series on How to Price Your Services. Here are links to the other articles:
- 4 Best Practices for Pricing Your Services Right
- How To Set the Right Prices Using Customer-Driven Pricing
- 6 Pricing Strategies That Will Immediately Boost Your Sales
Why Customer-Driven Pricing Works
Customer-driven pricing is centered around an understanding of what your customers value and what they expect to pay for that value.
Instead of focusing on the product or service, this strategy prioritizes the customer’s perspective. You set your price according to their expectations.
This ensures that your offerings align with actual market conditions and other factors such as competitor offers and pricing.
Know Your Customer Well
To set the right customer-driven pricing, you need to know your customers very well. Develop a detailed customer profile that includes:
This involves creating a detailed customer profile that includes:
- Demographics: Who they are.
- Psychographics: Their attitudes, values, and behaviors.
- Pain Points: The problems you are uniquely positioned to solve.
Your product’s perceived value hinges on how effectively it solves their pain points. A key to selling effectively is by showing your potential customers how you can solve their problems and improve their lives.
Other Ways to Add Value
You can add other types of unique value that your solution offers beyond problem-solving.
For example, you can provide flexible pricing options while competitors stick to a single price option. Offering various versions at different price points can cater to a broader range of customer needs. This enables different people to purchase at the price that is right for them.
You might also post-purchase support. This enhances the overall value of your offer even though it’s not a direct feature of the product or service.
The Challenges of Customer-Driven Pricing
Customer-driven pricing is not without its challenges. More so because creating an accurate customer profile requires consistent communication and feedback from your audience.
A key challenge is that people may not always be upfront about the price they are willing to pay. In my experience, most people will undervalue when asked how much they would pay for a premium service.
Therefore, it’s essential to combine data from customers with objective sales data to determine effective price points for each product or service.
Another challenge is that if you base your pricing strictly on your customer feedback, you may end up charging too low. This means that you leave money on the table through underpricing.
You can justify higher prices by increasing the perceived value through strong marketing and positioning your offer for its uniqueness.
Offering True Value
Your pricing strategy starts with knowing your customer, but it doesn’t stop there. Customer-driven pricing aims at delivering the best value for both you and your customers.
Use this strategy as a starting point for engaging with your customers. Then monitor and adjust your pricing as you gather more data from sales.
The ultimate goal isn’t just customer satisfaction but achieving a balance that benefits your business and meets your customers’ expectations.
Want to dive deeper into setting your prices effectively?
By embracing customer-driven pricing, you can better meet your clients’ needs and position your offerings for success.
Check out my course, Profitable Pricing for Self-Employed Professionals, where I guide you through the intricacies of pricing your products to reach your business goals.
Click here to find out more about the course.
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