How to Estimate Your Pricing Window
Most buyers shape their value perceptions relatively, and they base them on related reference points. For example, if you're buying a car, you decide on the fair value of the price tag of the car you want by comparing it to a different model from the same maker or to the another car from a different maker but with similar utility. Alternatively, if you're buying a new-to-the-world software solution, you compare its price tag to the value you have received from another software solution that is most similar to it.
While determining your pricing window is a multi-disciplinary and involved process, here are some quick steps if you're looking for a rough estimate.
Step 1: Find the Right Reference Point
In reality, the economic value can be calculated in a similar way. Just as buyers use relevant reference points to derive their value perceptions, the economic value of a solution can also be derived by adding the value of your differentiation to a base reference value. A reference value can be the value provided by a competitive offering, an alternative solution or the basis of competition in any given industry.
Step 2: Quantify the Value of Your Differentiation
The differentiation value for a positively differentiated feature or attribute is the additional value offered that surpasses the reference value. In contrast, negatively differentiated features or attributes deliver less economic value than the reference value by providing simplicity or reduced functionality. While this notion of relativity in value may add complexity to the estimation process, it's absolutely essential in order to position the value of your offering in relation to the next best alternative.
The process of quantifying the benefits can be quite complex and in most cases, it's a sophisticated endeavor of financial modeling. Below are some of the most common types of benefits that most solutions provide:
Step 3: Find out What the Perceived Value Is
A buyer's perceived value will generally be between their reference value and the differentiated value of your offering. And this is where the value proposition comes into the picture. The goal of a good value proposition is to elevate the perceived value as close to the true value of your offering as possible.
The goal of a good value proposition is to elevate the perceived value as close to the true value of your offering as possible.
Once you identified the right reference value, quantified your differentiated value, and uncovered the perceived value you are ready to determine your pricing window.
Ready to begin your own pricing innovation?
