When to Use Value-Based Pricing?

When most people think of increasing profits, they immediately think of either increasing sales volume (“Sell more PCBAs!”) or cutting expenses (“Cancel the company barbecue!”). A far more efficient way of increasing profits is to improve your pricing strategy.

Most electronics contract manufacturers (ECM) use a cost-plus pricing strategy to bid on new business. This is fine when there isn’t much to differentiate you from your competition. However, through careful evaluation, there are many opportunities to replace normal cost-plus pricing formulas with a value-based pricing approach.

Value-based pricing is a strategy that determines the price of a service based on the perceived or estimated value to the customer rather than the actual cost of delivering that product or service. In simpler terms, value-based pricing determines the price by asking “What’s it worth to ya?”

As a contract manufacturer, here are three questions to help you determine whether value or cost-based pricing makes more sense.

Does your company have a unique offering?

If you and your neighboring contract manufacturer are indistinguishable and target the same customer base, then value-based pricing likely isn’t for you. But if you can distinguish yourself from your competition , then you may be in a position to offer something that the customer values and cannot get elsewhere. Differentiation can come in many forms: clearing a certification requirement, providing an option for a dedicated account manager, installing superior equipment, etc.The key consideration here is that your unique offering should be defined relative to your competition. For example, having the best equipment wouldn’t be a differentiator if competitors also have the same equipment.

Can you identify a segment of your customers who values your offering?

Let’s take an example: the aerospace market in your area is booming, and you’re the first in your region to be AS9100 certified. Now, you can charge this customer segment a premium for your manufacturing services because you have a relevant quality certification that competing contract manufacturers (CM’s) do not.Conversely, if most of your customers don’t value AS9100, but you market it to them anyway, you may find that customers switch to less costly alternatives.

Can you determine how much the customer segment values your offering?

Start by coming up with your price independent of your unique offering. It may be aligned with similar services offered by electronics manufacturing services (EMS) companies you compete with. Then, if you add in the unique offering your company has, how much extra can you charge for it?For example, let’s say you and a competitor both offer Surface Mount assembly for around $100/unit, but only your company has the capacity to deliver the product in time for an upcoming demo. All else being equal, you would want to identify how valuable a delivery before the demo would be to your customer. If you cannot accurately quantify this value, then you may leave money on the table or scare off a great customer.

If you haven’t integrated value-based pricing into your RFQ process, that’s okay! You may be in a market that is not properly suited for customer segmentation, or your organization may still be developing its capabilities in this area. Value-based pricing requires some strategic analysis and effort to implement, but can make a very direct contribution to your bottom line.CalcuQuote was designed with differential pricing in mind. Using CalcuQuote’s intuitive user interface, your Quote Team can reduce risks of underbidding a quote, improve margins by analyzing historical data and reduce the cost of selling by streamlining the quoting process.

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