How to Price Products Using the Value vs Cost Formula

Learning how to price products properly can be a pivotal moment for your business and not necessarily for the reasons you think!

Before you dive into the numbers, it’s important to understand that people aren’t buying your products and services solely based on how much it costs. In fact, almost 70% of consumers admit that they actually make purchases based on their emotions and how they feel the product will impact their lives.

The right pricing does more than just cover production and operational costs. It communicates the value, quality, and positioning of your products to your customers. This is where the value vs cost formula comes into play and using it to align your pricing with the perceived benefits to maximize profitability.

In this guide, the insights we offer will help you determine the ideal price point for your product. Applying these strategies will help you create irresistible offers and boost your conversion rates. Let’s get started.

What is The Value vs Cost Formula?

“Price is what you pay; value is what you get.”

– William Buffet

For a moment, we want you to think back to the last purchase you made. Was it a new suit? Possibly upgraded the sound system in your car? Maybe a simple $7 coffee? Whatever it was, we want you to consider the reasons why you bought it.

Yes, iced coffees are tasty but we’re talking about more than surface level value. That $7 is more than just a treat for customers. For them, it’s the energy boost needed before a big presentation at work. It’s a much needed pick-me-up after taking care of their new baby all night. It’s a peace offering for a friend.

You see, the price is a little expensive for 24oz of coffee you can make cheaper at home. However, thousands of people pay for that extra caffeine boost everyday because of the value it gives their lives. The Value vs Cost Formula is about the balance between what a product or service provides and what a customer is willing to pay.

It’s not just the price.

It’s the perceived benefits, like convenience, comfort, or emotional satisfaction, that make it worth the cost.

The Power of HOKA

In its simplest form, HOKA shoes are simply rubber, foam, and other materials combined to cover and protect  your foot. So, why are people willing to pay $150 or more for a single pair?

The value lies in the experience of the offer. According to them with every pair you’ll get: 

• Soft, cushioned feet during everyday miles (making it easier to go further) 
• A high-quality foam midsole that provides a soft yet resilient ride (less blisters)
• Combat high wear zones (last a long time)
• Stability (keep your ankles safe from injury)

For runners, these features can significantly enhance their training experience. The higher price is often seen as a reflection of the superior quality, making the investment worthwhile. Consumers recognize the value these shoes bring to their daily lives, which justifies the cost.

Price Your Product in 4 Simple Steps:

Calculate Costs

Start with the basics. Determine your Cost of Goods Sold (COGS), which includes production costs, shipping, labor, and overhead. This ensures your pricing covers the essentials and minimizes losses.

Overhaul Your Value

Take the time to consider what sets you apart from your competition. This is where your value lies. Ask yourself things like, 

• “What unique benefits does your product provide?”
• “What transformation do you offer that others don’t?”
• “What problems does your product solve?”
• “How does your product improve your customer’s lives?”

Understand Your Target Market

Your audience plays a significant role in determining the price of your product. To effectively price your offering, you need to understand who your customers are, what they value, and how much they’re willing to spend for that value. Consider the following factors:

• Income Level: If your audience has a higher income, they may be willing to pay more for premium or luxury products. For lower-income audiences, affordability will likely be a priority.
• Lifestyle: Busy professionals might pay more for convenience, while budget-conscious consumers may seek value deals. Price your product to align with what makes sense for their lifestyle.
• Priorities: If your customers value quality or exclusivity, they’ll pay a premium. If they prioritize savings or simplicity, you’ll need to price accordingly to appeal to them.
• Competitor Prices: If your competitors target the same audience, their pricing sets expectations. Pricing above competitors can position you as premium, while pricing below can make you more accessible.

Choose a Pricing Strategy

The right pricing strategy is crucial to ensure your product appeals to your target audience and aligns with your business goals. The strategy you choose should reflect the value you offer, the way your customers use your product, and the competitive landscape. Here are some of the most common pricing strategies to consider:

1. Flat-Rate Pricing: Offer a single product with a set of features for one price.
2. Pay-As-You-Go Pricing: Charge customers based on their usage levels.
3. Tiered Pricing: Provide multiple packages with varying features at different price points.
4. Per-User Pricing: Set a fixed fee for each user accessing the product or service.
5. Subscription and Membership Models: Charge a recurring fee for ongoing access to products or services.

How Pricing Psychology Enhances Value vs Cost

Pricing your product effectively is a delicate dance with your target customers. Set your prices too high and customers may flock to competitors. Set them too low and you risk undervaluing your product and cutting down your profit margins.

You’ll find that it’s fascinating how seemingly small things influence people’s purchasing decisions. Let’s go over three powerful pricing techniques that can shape how customers perceive your product, enhance its value, and ultimately drive more sales.

3 Main Types of Pricing Psychology Strategies

Price Framing

When we see a low price next to a crossed-out higher price, it immediately triggers the perception of savings and value. The higher price makes the discounted price seem like a fantastic deal even if the actual discount is minimal.

Amazon uses this tactic all the time. For example, a product might be listed as “$79.99 but be listed next to a crossed out original price of $99.99.

Putting the discount right next to the original price, or maybe even your competitor’s higher price, the price feels like an irresistible bargain, and like the customer would be missing out if he didn’t take advantage of it.

Charm Pricing

This psychological strategy simply entails ending prices with “9” to increase its appeal.

Charm pricing is a curious psychological strategy that leverages the “left-digit bias,” where consumers focus disproportionately on the left-most digit of a price. By ending prices in “9,” such as $599 instead of $600, the product is subconsciously perceived as being closer to $500 than $600.

💡MIT and the University of Chicago had performed an experiment in 2003 and found that charm pricing increased consumer demand by 35%.

This strategy works best for non-luxury products aimed at cost-conscious customers who are looking for deals. For example, a software subscription priced at $9.99 feels significantly cheaper than $10, even though the difference is only one cent. However, charm pricing is less effective for luxury or high-end goods, which often benefit from rounded prices to reinforce their premium positioning.

Notice the difference in information next to the price. Amazon products often include detailed descriptions and reviews, while Louis Vuitton keeps it simple. This simplicity suggests the product’s quality speaks for itself, reinforcing its exclusivity and luxury without needing to justify its value through lengthy details.

Workshop Your Offer to Be Irresistible

Your value proposition is the core of your offer. It should clearly communicate the transformation your product provides and why it’s worth the investment. Here are some of the basic areas where you can make your offer even more appealing to your audience.

Value Proposition

Your value proposition is the heart of your offer, clearly explaining the transformation your product delivers. It’s not enough to list features. You need to show how your product solves problems and improves your customer’s life.

Bonuses:

Adding bonuses increases the perceived value of your offer, making it feel like a better deal. To maximize impact, ensure your bonuses are tailored to your audience’s needs and enhance the main product.

Guarantees:

A strong guarantee reduces risk and builds trust, making customers feel secure in their purchase decision. Policies like a “30-day money-back guarantee” or “no questions asked” returns show confidence in your product. The more reassuring your guarantee, the easier it is for customers to commit.

Urgency:

Urgency motivates customers to act quickly by creating a sense of scarcity or time sensitivity. Limited-time discounts or offers with countdown timers push customers to decide before they miss out.

Analyze, Test, Optimize, Repeat!

The best part about all of this is that no matter the offer you launch, you can always enhance it later to be even better. 

A/B testing is the process of creating two or more variations of a specific element on your sales page, and using the data of which version converts better to make improvements and upgrades. You can test ANYTHING on your page from headlines to colors to images. 

When you’re A/B testing, you’ll only want to run two variations of the same thing with ONE feature different. This helps you find specific features that appeal to your audience and drive conversions. As you continue to test different features, you’ll be able to upgrade your site as you go to find exactly what motivates your visitors to take action. 

TIP: Another way you can test your website, product, or other things related to your offer is to test by running focus groups or consumer tests BEFORE you launch. These forms of testing tend to be cheaper, help you find more specific audience preferences faster, and will give you the opportunity to pick your audience’s brain to help strategize future products and campaigns.

Resources for Workshopping Your Offer

• UserTesting.com: Provides insights into user behavior and preferences, helping you understand how real users interact with your sales page.
• Crazy Egg: Offers heatmaps and A/B testing tools to visualize user engagement and test different page elements.
• Optimizely: An experimentation platform that allows you to run A/B tests and personalize your sales page for different audience segments.

Adjust Your Pricing to Reflect Your Value

This formula is not like a mathematical formula. We don’t have any specific numbers to give you. 

The Value vs Cost formula is simply meant to be a foundation on which to build your final price range for your product. It’s about understanding the balance between what your product offers, the emotions it creates, and what your audience is willing to pay for the perceived benefits.

The bottom line is that pricing is not just about covering costs, it’s about communicating value, building trust, and creating offers that resonate with your customers. By using strategies like bonuses, guarantees, and urgency, combined with pricing psychology techniques, you can position your product as both desirable and worth the investment.

Do you need help refining your pricing strategy? Contact our team today to get create better offers that convert!