{"id":21229,"date":"2022-11-15T18:33:36","date_gmt":"2022-11-15T18:33:36","guid":{"rendered":"https:\/\/www.joinc12.com\/?p=21229"},"modified":"2023-03-20T13:57:10","modified_gmt":"2023-03-20T13:57:10","slug":"the-tricky-proposition-of-value-based-pricing","status":"publish","type":"post","link":"https:\/\/www.joinc12.com\/article\/the-tricky-proposition-of-value-based-pricing\/","title":{"rendered":"The Tricky Proposition of Value-Based Pricing"},"content":{"rendered":"\n
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Responding to an Inflationary Market<\/i><\/h2>\n

It is hard to overstate the benefits of value-pricing, especially in inflationary markets. As all business owners can attest: pricing can be a tricky proposition. Overprice and you risk losing customers. Underprice and you leave money on the table. Research shows businesses that implement value-based pricing strategies will be well-positioned to thrive. Joan Johnson\u2019s story illustrates common challenges.<\/p>\n

Joan Johnson owns Greenstone Bed & Breakfast, a 30-room historic inn in Saugatuck, Michigan. Saugatuck is located in Southwestern Michigan and is known for sand dunes, sunsets, farm-to-table cuisine, and local artisans. Joan is a winsome Christian, and many of her customers are pastors, youth leaders, or retirees seeking a weekend retreat from city life. They return time and time again to experience the rest and retreat offered at Greenstone. While Saugatuck experiences most of its tourism throughout the summer,\u00a0 its most popular season occurs during three consecutive weekends in the fall during the city-wide art festival and at the height of fall colors.<\/p>\n

Joan has struggled with pricing. In the past year, her expenses have increased as labor and food costs experienced record inflation. It seems clear that she should raise her prices, but how? She wonders about the ethics of price increases and how they might affect her less affluent customers.<\/p>\n

Her nearest competitors are chain hotels that offer standard rooms and complimentary breakfast but do not offer the historic charm or personalized niceties of Greenstone. Joan wonders whether she should price her rooms at a comparable rate to those other hotels. Or is the experience at Greenstone worth more? And if so, how much more? How much are her peak weekends really worth?<\/p>\n

The Importance of Pricing Right<\/h2>\n

Around the world, business leaders are grappling with how to respond to the inflationary market. And it\u2019s easy to feel trapped between two less-than-optimal options.<\/p>\n

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  1. Raising prices with the risk of damaging customer relationships<\/li>\n
  2. Maintaining prices with the risk of eroding profitability<\/li>\n<\/ol>\n

    It\u2019s important to think strategically about our pricing. Determining the right pricing strategy is one of the most effective ways to reach our ideal profitability.<\/p>\n

    As a McKinsey report<\/a> <\/span>highlights, effective pricing strategies can deliver a 2-to-7 percent increase in return on sales\u2014offering a powerful measure of control in an inflationary market and beyond.<\/p>\n

    If we want to adopt a more strategic pricing solution, the steps below provide a path forward. Value-based pricing<\/i> aims to leverage the value we offer our customers to grow revenue. Its benefits are felt beyond the bottom line as we seek to be good stewards of our businesses.<\/p>\n

    Value-Based Pricing<\/b><\/p>\n

    \"Value<\/p>\n

    A Biblical Perspective on Pricing<\/h2>\n

    It may seem logical to set prices according to customer expectations and industry practices. Capitalism defines this as \u201cwhat the market will bear.\u201d But it is na\u00efve to believe the market will moderate this tension consistently and justly.<\/p>\n

    For Christian capitalists<\/a> <\/span>interested in serving others while building a loyal customer base, God\u2019s Word is clear that we are to use honest weights and measures (Prov. 11:1, 16:8, 16:11, and 20:23). New Testament scholar Wayne Grudem suggests that \u201cprofit is … an indication that we have made something useful for others.\u201d Such profit should reflect the value of our time, skill, and risk.<\/i><\/p>\n

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    \u201c<\/i>Profit is an indication that we have made something useful for others.\u201d<\/i><\/span><\/p>\n

    \u2013Dr. Wayne Grudem<\/span><\/p>\n<\/blockquote>\n <\/div>\n <\/div>\n<\/section>\n\n\n\n

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    So as we seek to love God and pursue a profitable pricing strategy<\/a><\/span>, the following considerations will help us navigate potential issues:<\/p>\n

    \"Value<\/p>\n

    Pricing for Value, not Cost<\/h2>\n

    Most companies tend to set prices in one of two ways: 1) cost plus a target margin, or 2) competitive pricing and living with the resulting margin.<\/p>\n

    While these methods work, they can leave money on the table, erode brand value, and create openings for competitors.<\/p>\n

    Value-based pricing offers a more powerful model for pricing, profitability, and performance.<\/b> Using this method, we justify our pricing by:<\/p>\n