While customers often mix up price and value, it’s important that as sellers, we know that a good price doesn’t always mean the lowest price. Instead, pricing should be based on value–that’s why value-based pricing is the best strategy when setting prices for your products or services. 

Value-based pricing starts from understanding your customers, deciding on the most suitable target markets, and positioning your product to fit the needs of that target market. 

Customer Segmentation

The first step in value-based pricing is understanding your customer. Grewal and Levy (2016) call this step segmentation, which is when the customers of a business are divided into different groups called segments. 

Segmentation is based on understanding your customer, their needs, motives, and what features they value in the products and services they buy. Especially in pricing strategy, segmentation should be based on the preferences, needs, and motives of potential customers. Through this, it’s easy to position different products to fit the different needs of different customer segments. 

Typically, it’s good to find 3-5 must have core features that fit the needs of almost all your customers. Without these, it will be difficult to breakthrough in the market. In addition, different customer segments will have additional feature combinations that create additional value for the customer. These could be related to, for example, quality, convenience, speed, quantity, sustainability or ethicality, or price.  

Now putting it into practice, imagine that a customer is looking for a graphic designer to develop a new logo for their brand. Core features of a logo development service could be unique briefing to the designer, opportunity to give feedback on a draft, and the final product–a visual that represents the brand. In addition to these basics, different customer segments will have different features that they will look for in this service. Some might want a simple vector image, while others want a more detailed, unique visual. Others want to get a good logo fast, while others want to make multiple iterations to find the perfect logo for their brand. 

Choosing Your Target Market

After segmentation, you will need to decide your target market. This will then help you position your product or service to fit the needs of these target markets. Businesses typically have three options:

1. Mass marketing – offering the same mass product for all target markets 
2. Differentation – offering differentiated products or services to different markets 
3. Niche marketing – deciding on a or few segments, in which the business specializes in  

Globalization and online shopping have made mass marketing a challenging strategy. Buyers have a large variety of options to choose from, while they have also become pickier about their purchases. Buyers have their needs, and, more often than not, won’t settle for a product or service that doesn’t meet all their needs. 

Therefore, it’s typically easier and more profitable to offer different target markets different products or services, or only focus on selling to a few interesting customer segments. 

Positioning Your Product or Service

To support your pricing decisions, it’s useful to create a market positioning map based on the price and value of different competitors in the market. With a market positioning map, you can evaluate the value of your product or service, its price range, the competition in each market, and identify potential markets. 

Looking again at the example of graphic designers’ logo design services, different players in the market can be mapped out based on, for example, the quality and iterations of design. Most likely, many of the competitors will fall somewhere in the middle, as in the positioning map below. However, there can be some outliers that target more niche markets, such as creating only highly visual logos with multiple rounds of feedback, which could be sold as a more premium service. On the other hand, there can be cheaper services, such as simple logos with minimal feedback iterations, that target the other end of the market of customers who aren’t willing to spend much money on these kinds of services. 

When identifying which niche to target, it’s important to evaluate that the segment is still large enough to ensure that your business remains viable. However, when they are, having a niche marketing strategy can be useful, as you are more likely to fill the needs of these specific customers than competitors with a more generalized service offering.