Value Based Pricing - What is it and how to use it for more sustainable international growth
Value Based Pricing is a tool to determine an appropriate, sustainable (profitable) price for a good or service. According to the definition in Wikipedia;
[Value-based pricing is a pricing strategy which sets prices primarily, but not exclusively, on the value, perceived or estimated, to the customer rather than on the cost of the product or historical prices. Where it is successfully used, it will improve profitability due to the higher prices without impacting greatly on sales volumes.]
How do associations set prices?
Having worked with hundreds of associations for more than 20 years, our experience has been that many associations under-price their membership, education and training products.
Often, price increases are made only sporadically and then the increase is based on what management (and volunteer leaders) feel the membership will bear as an increase to the historical price. Rarely does anyone question if the historical prices were appropriate to begin with?
To make matters even worse, associations often then discount further for international markets, setting their prices to accommodate those with the least ability to pay rather than what a potential target market would be willing to pay (i.e. pricing for the lowest common denominator or cheapest price.)
When you consider that the cost of delivery for goods and/or services is almost always higher internationally compared to the home market, it is no wonder that many associations are disappointed in the financial performance of their international membership and customer base.
How to apply Value Based Pricing?
Value based pricing begins with understanding the true value or utility of your good or service from the customer perspective. What is it "worth", translated into a dollar amount or price.
Professional Membership Association Example
For an association whose members are individuals, you can start by understanding how your association product or service relates to the member's career and professional advancement. This is as true for membership dues as it is for the price of your conference registrations.
For white collar professionals (lawyers, physicians, technicians, engineers, designers, managers, etc.) you can take the approach of relating your annual dues to what an hour of earnings equates to for an average member. For example, if an average member has an annual salary of $85,000, this equals approximately to $50 per hour (based on 1,700 hours worked per year).
The next question is, how many hours of benefit (value) does your association deliver to your members per year. In other words, if your associations adds the equivalent value (in terms of information, networking, news etc.) of a full day's work for an average member, your membership dues could be deemed to be worth $400 per year to that member (8 hours X $50/hr).
Another way to look at this is through certifications. If members in your profession are able to earn just 5% more after receiving certification than non-certified members, this is worth $4,250 to the same theoretical member ($85,000 annual salary X 5%), every year.
Trade Association Example
For trade associations, whose members are companies, a similar approach can be taken. In this case however, you want to determine what is the business value your association provides to your company members. From the member company perspective, they will likely consider how your association will help them in at least one of three key areas; a.) increasing revenues, b.) decreasing costs and/or c.) reducing or eliminating risk.
Even activities like government relations and lobbying can be viewed as either reducing risk and/or reducing costs for a company in a way that should be able to be quantified.
To understand the true value, you will need to understand the volume and scope of your member companies' business and how your association product or service is used to drive business results for your members. For example, if a business has an annual budget of $2million and can reduce costs by just 1% because of what they have learned from your association, that is worth $20,000.
The key to using a value based pricing approach is the ability to really understand the customer's perspective and how your products and services are used. The next step is to translate their utility (value, worth) from your member's perspective into an equivalent dollar amount. The result is your value based price.
The added benefit of taking this customer centric approach is that you will also have a much better understanding of how to communicate the value you offer to your members and customers, in terms they clearly understand. This is especially important when you announce price increases.
Members' don't really want to hear that you are raising your prices because your costs have gone up. They only want to know if what they are getting is worth what you are asking.
We are confident that in many cases, associations that take a value based pricing approach will find that they have been under-pricing their products and services for many years and can now start to run a more profitable, sustainable business based on fair value and appropriate pricing.
Note: If you find that you are having a challenge to reconcile the value you are delivering with your current prices, you have uncovered a serious problem, and an opportunity.
Rather than lowering your prices, use your customer insights to design and deliver greater value, eliminate unwanted products, and to have a more sustainable business.
Want help in designing a more sustainable and profitable organization?
Contact us to help you build a better business model. firstname.lastname@example.org