Value-Based Pricing

[Spence]

Would like to see some feedback on this.

I've used Product/Cost-based pricing for years and I feel I have lost a valuable section of the market and also have not received fair value on most of my products.

I've started looking into the VBP method because I feel I can open up my market reach and increase revenue at the same time.

Most, if not all, of my business is custom work. Therefore, I'm in contact with the customer and learning quite a bit about them, their likes and dislikes and many other items that I can use to place a value on the product they are buying. When I say "value on the product" I mean the value to the customer, not me. How valuable is my product to the customer? As long as I set a minimum in my head, I can increase proportionally according to these values.

Of course, prices set on a website will no longer be viable. This is sticky and I admit that it has turned me away when I'm looking at something and there are no prices listed. But with the quality of our work on display, the potential customer should be able to decide whether to proceed or "go to Walmart."

[NVLeatherWorx]

Spence, this is one of those topics that is indeed tough to figure out and we all have our own methods of going about pricing such work out. I too work as primarily custom only but I do always have a few cash & carry items available for when I participate in fairs and shows. One thing I always do is make sure that what I have for cash & carry is priced the same as it would be if a client were to request a custom work. Typically, my cash & carry items are either simple (plain, no stamping/tooling) or include some simple linear design work along a border or two but that helps me to set the "tone" of a conversation when a client starts talking other needs they are looking at. My base price on a standard (plain) item is where all of my base pricing for the individual item starts, the same goes for the one that has some simple stamping on it. And all of these prices are based on the same pricing strategies that any other manufacturer of goods will incorporate to ensure that all of their overhead, materials, and labor are captured and that a fair profit is achieved.

I personally factor out all of my operating overhead, my labor rate (and I am a one-man shop), and my materials. My labor rate is based on the actual time required to make the item as it is displayed/advertised and I do this by taking the extra time to document every process or step from cutting to packaging. Now none of this goes directly towards the value to the customer, so to say, but it does have a direct impact on how the customer perceives the item by selling them on how you make each piece, why you use the materials/techniques that you do, and how they make your product better than what they can get from another source, especially the "mega-mart" outlets. This is where the value to the customer comes into play and that value is our work and how it can help them if they buy it. Because of the materials that I select for each item and the fact that I pretty much design everything that I make (and I have the drawings to support that), coupled with the fact that I have been in this trade for over 40 years and have made everything from a simple wallet all the way through to some very ornate saddles, I tell each one of my potential clients that I will guarantee that they should never have to buy another item to replace the one that they will get from me (unless they get bored with it and want another one) as long as it properly used and cared for, and I remind them that they won't get that type of service from ANY major designer brand and definitely not from any big box store or outlet.

I struggled with this very issue several years ago because I would always hear that response, "I can get it at (enter garbage retailer of choice here) for a fraction of that", or "I have a fiend who does this as a hobby so I will have them make it for me because it would be cheaper". And they were in essence correct with those comments. But that made me start thinking about who I am competing with and where I could set my pricing at to possibly capture those sales and then it dawned on me, I am not competing with anyone because there isn't another person in my area that is doing this type of work at this level and with the quality of materials that I use. I also realized that although there are several hobbiests in my area that none of them design or create anything original and only work from a kit based model (and we all know how substandard those materials are). It was then and there that I set my goal of selling my skills and the quality of materials as the value in the pricing and if a potential client wants to take their business elsewhere no problem, they just told me by that action that they aren't into it for the value, just the price. I always lay it out for every customer that value is not a price based concept it is the concept of understand what you get for your money, it is an investment in quality and craftsmanship and the return is the long-term lifespan of the product received.

[Spence]

That, my friend, is exactly what I was looking for in feedback. Thanks for your time in putting that out there for me, and others. Have a happy and prosperous 2015 !

[NVLeatherWorx]

And Spence, if you would like to know how I break it all down, just PM me and I will send you the details. Hope your Christmas is very Merry and may we all have a prosperous and awesome 2015.