Pricing Triangle
When setting prices, we typically look at (1) value, (2) competition, and (3) cost. Academic research has shown firms that use that value-based pricing are most profitable. However, what we see is that the vast majority of companies price their products or services by anchoring on costs (cost-based pricing) or on competition’s prices (competitive-based pricing).
While costs and competition are important to consider, we need to calculate value and put our price as close to that value as possible. The pricing triangle is a simple tool that helps us to summarize how we set our price.
To calculate value-based pricing, you can follow a 4-step process, namely:
- Step 1: Choose a specific target segment
- Step 2: Ensure that customers “see” the value they are getting
- Step 3: Compare your solution to the next best alternative
- Step 4: Quantify the monetary value of differentiation
The last is the most critical and difficult step. Here we need to calculate how much are customers in the chosen target segment willing to pay for the unique benefits just identified (i.e., completing the Needs-Features-Benefits-Results chain). This typically involves different research techniques, with gathering the voice of customer being key. Using value-based pricing, while taking into account competition and costs, is an effective way to maximize profitability and avoid pricing your offerings too low.
Download the Pricing Triangle tool
