I recently returned from a trekking trip in northwestern Vietnam. It was absolutely fascinating to see the local culture, but I have to confess to being somewhat surprised by some of the local pricing.
For those of you who know Vietnamese food, you are probably familiar with the Banh Mi sandwich. It is a 6” fresh baguette filled with grilled meats, lettuce, cucumber, assorted fresh greens and herbs, pickled carrots, pickled daikon, and a wonderful chili paste. It is beyond amazing – and costs about $1.
At the same place, one could buy fresh ginger tea for about the same $1. The fresh ginger tea contains a few slices of fresh ginger brewed in water with some honey. That’s it.
The cost to make each item is dramatically different. How could they charge me the same price? The fresh ginger tea, at best, has 3 cents in ingredients and much less labor cost than the Banh Mi.
The answer is value pricing.
Value-based pricing is a strategy of setting prices primarily based on the consumer’s perceived value of the product (or service). It is different than “cost-plus” pricing, which factors the costs of materials and production into the pricing calculation.
And with value pricing on certain types of products, the margins can be, and are, dramatically higher. We have been conditioned to highly value freshly prepared drinks; from our $5 latte to our $8 juice – not to mention our $15 adult beverage. Consequently, both the Banh Mi sandwich and the ginger tea were both worth the price charged despite the huge difference in cost.
One of my clients is Beauty Blender, which among other products, manufactures a pink egg-shaped sponge used for applying make-up. It sells for about $20 in Sephora.
Sephora decided to manufacture and sell its own store brand make-up sponge that looked just like a Beauty Blender and priced it at $8 – and sold it right next to the Beauty Blender!
You would think the poor Beauty Blender sponge didn’t have a chance.
But the Beauty Blender sales were barely affected. Why? Because we had developed a powerful value proposition and brand promise that duplicate sponges could not match. Consumers felt that at $20 the Beauty Blender sponge still offered greater value than an $8 sponge without that value proposition – even it is was from a great brand like Sephora.
And the concept of value pricing is not reserved for B2C products/services. I’m sure you can think of many B2B products/services where value pricing produces increased revenue and much higher margins.
So, you might be wondering right now whether your product or service can benefit from value pricing. Do you have a compelling value proposition? Does it justify value pricing? Are you leaving revenue (and profit) on the table?
Those are very good questions.
What will you do to find out?