Value-Based Pricing – The Basics

Value-Based Pricing - The Basics

This five-part series explores the value-based pricing model’s inner workings and breaks down the model’s most basic elements.  The model focuses on competition and cost like other models do but also factors in an often overlooked aspect of your events – the customer.  You will also see how this model can maximize your revenues and deliver an experience your customers won’t soon forget. In the first part, we cover the basics of the model. In parts two and three, we look at how the value-based pricing model reveals gaps, increases value, and how the prices should guide the cost. Finally, in parts four and five, we put the value-based pricing model into action and look at determining your ticket types and setting and increasing prices.  Our primary goal throughout the series is to break down these various parts to make you comfortable implementing this model into your events.

With the return to in-person rehearsals and live events slowly becoming visible on the horizon, you may already be thinking about or making some big plans.  Some of you probably have a million tags picked out to sing at or after your first rehearsal.  Some may be planning that first rehearsal and making it a big celebration.  Whatever your plans are, one thing that is probably in your future at some point is a chapter show.  If you have ever planned or helped plan an event, you know that there are many moving parts. One of the most stressful parts of planning the event is what to charge for admission.  Unfortunately, I am not here to tell you the perfect price. Still, we are going to look at probably my favorite pricing strategy for events – the Value-Based Pricing Strategy.  

Before we dive into the nitty-gritty details of this pricing method, ask yourself this question.  Do you know what strategy your chapter currently uses?  It’s okay if you don’t, but you’ve most likely heard of and are using either the Competitive Pricing Strategy or the Cost-Plus Pricing (or what’s known as Markup Pricing). 

Competitive Pricing Strategy

In the Competitive Pricing Strategy, you are looking at what prices your competitors are selling their tickets for and basing your pricing solely on their pricing. You’ll either price yours lower, match their prices, or price yours higher. How you price depends on several factors, but we won’t get into those details. 

Cost-Plus Pricing Strategy

Cost-Plus Pricing focuses on your cost and a fixed percentage that you add on top of that cost.  As a simple example, if you need to charge $10 per ticket to cover your expenses and want 50% profit on each ticket, you would sell each ticket for $15. 

The Shortfalls

However, these strategies do miss one key factor – the customer.  What is the customer willing to pay?  Suppose we only look at the competition or our costs. In this case, we may charge too much for our show and drive people away.  Potentially worse, depending on how you want to look at it, you may pack the house only to find out that your audience members were willing to pay more for their tickets.   

To avoid these shortfalls, we turn to the Value-Based Pricing Strategy.  In this model, we factor in the critical element missing from the other two strategies – the customer.  This framework will allow you to maximize your revenues and, with appropriately managed costs, your profits by pricing your event at the level they are willing to pay.  This strategy has three key components: perceived value, the actual price, and the cost per ticket.  

Perceived Value

The perceived value is what the customer thinks they will get out of your event. Perceived value can be tricky to calculate.  You will use market research concepts to help arrive at a number, but this is outside our discussion scope. 

Actual Price

Next, we have the actual price or what your customer pays.  On “The Price Is Right,” four people are called to Contestant’s Row, and each guesses an item’s actual retail price. The person who is closest to the price without going over gets on stage to play a pricing game.  We have a similar goal with the actual price.  Our goal is to have the actual price (the contestant’s guess) closest to the perceived value (the actual retail price) without going over.  When we have achieved this goal, we have created excess value that the consumer gets above the actual price or “consumer surplus.” 

Per Ticket Cost

Finally, we have the per ticket cost, which helps us establish our baseline price to break even.  To calculate this, we simply divide the total cost by the number of tickets.  If we have 1000 tickets and our total cost is $10,000, our per ticket cost is $10.  Now, we bring it all together.  If the perceived value is higher than the actual price, your customer is more likely to purchase, and if the cost per ticket is lower than that price, you make money.

There’s no denying that the Value-Based Pricing Strategy is more complicated than the other two strategies.  However, it allows you to design the best long-run economic model and shifts your overall goal. You aim to deliver an event at a price that will enable you to earn a return but still have meaningful “surplus” value above the ticket price, unlike the other two models.  Striving for this goal makes you profitable and gives you happy customers.  Next month, we will look at how value-based pricing can reveal gaps between perceived value and cost and increase perceived value.