You have to admit that the price of your product or service has a huge impact on the number of conversions you make.
When it comes to pricing your product/service, you have two options. You can either base it on the cost or value.
But, the question is, how do you know which one is right for you? Therefore, It helps to have a good understanding of what each pricing model means and how you can incorporate one into your own business.
So, to help you decide how to price your goods, below you’ll find the key things you need to know about cost vs value-based pricing.
What Is Cost-Based Pricing?
With cost-based pricing, you price products based upon how much it costs to produce them and the profit you want to make. This is the based way to price physical products.
So, if a product costs $200 to create, you may want to make a $50 profit. This means you would sell the product for $250.
If you’ll be shipping the products to customers, these costs can also be factored in. A lot of customers prefer free shipping these days, so you may need to up the selling price to cleverly cover the “free shipping” costs.
Example of Cost-Based Pricing
Total cost of product = Manufacturing + Marketing + Shipping
= $ 200 + $ 20 + $ 50 = $ 270
Profit margin (Markup) = 30%
Selling price = Total cost of product + profit margin
= 270 + 270 (30/100)
= $ 351
This means you’ll be selling the product for $351 to make a profit of $81 per sale. This is a basic example and how Cost-based pricing works in a typical business.
What Is Value-Based Pricing?
With value-based pricing, you price the goods based upon the value they provide to customers. You’ll be setting a cost based upon how much your customers will be willing to pay for the goods or service.
While this can be the best way to price digital products, it doesn’t come without its challenges. You’ll need to spend a lot of time researching similar products and their prices to establish how much your products are worth. There is also the fact that different people value things differently. So, not all customers will be prepared to pay the price you set. However, this is the same for cost-based pricing too.
Examples of Value-Based Pricing
Apple & Starbucks.
Yup, you read that right. We all know much we pay for their products and not because it costs more to manufacture them but because of the brand value and customer service they provide.
Coming back to digital products & services, an IT consultant can charge a lot for a simple call because she knows she can solve a bigger problem for her clients, that could probably cost them their business.
If your marketing course can get a student to generate an extra $2K or $3K per month in their business, you can easily charge $500 for it or maybe $1000 as well.
What Benefits Does Each Provide?
Both cost-based and value-based pricing offers numerous benefits.
With cost-based pricing, you’ll have a set price that you apply to the products. You won’t need to spend as much time researching what to charge or working out the value of the product. It also ensures that the cost of production is covered, making sure you make a profit from each sale.
With value-based pricing, you can potentially earn more profits than you would with cost-based pricing. You’ll also find this type of pricing tends to build up more customer loyalty. Customers will know you’re proving value, so they’ll be more inclined to buy additional products from you when you release them. Again, Apple is a great example here!
Differences Between Value-Based Pricing & Cost-Based Pricing
The primary difference between the both is that value-based pricing is more focused on benefits for the customer rather than features of the product or service which are cost-based pricing’s primary differentiating factor.
Cost-based pricing is based on the number of benefits that can be obtained, whereas value-based pricing calculates what people are willing to pay to get those benefits.
How to Know Which One Is Right for You
In order to determine which type of pricing would work best for you, it’s important to think about the type of products you’re selling.
If you’re offering physical products, cost-based pricing tends to work better. (Unless you have a big brand value!)
However, if you’re selling digital products or services, a value-based pricing structure often works best. You can still take into account any costs that occur through the creation or marketing of digital products. However, a value-based approach does tend to work so much better in this case.
As you can see, both options have their own benefits. So, when working out which type of pricing model to use in your business, it’s important to take into account the pros and cons of both.
Now that you’ve sorted your pricing model problems, book a free strategy call with us to see if we can get those conversion rates higher for you and make you more green stuff.