June 24, 2019 | By: Carey Balzer

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Differences Between Cost-Based Pricing and Value-Based Pricing in Marketing

If anyone tells you there are hard and fast rules when it comes to pricing marketing services, they’re lying. Marketing fees and pricing structures can range from downright cheap to obscenely expensive.

Setting the right pricing structure can make or break a business. That’s why it’s vitally important that business owners understand the differences between cost-based and value-based pricing in marketing.

What Is Cost-based Pricing?

With the cost-based pricing approach, businesses calculate the costs of providing a service. A markup is then applied to determine the charge to the customer. The goal is to charge more for the service than it costs to produce.

For this reason, cost-based pricing lends itself well to marketing projects. Individual projects can range in scope, causing prices to fluctuate depending on various goals and objectives. Cost-based pricing can easily scale with projects of different sizes, making it the ideal choice for project pricing.

Benefits of Cost-based Pricing

Businesses that operate on a cost-based pricing structure tend to charge by the hour. This method benefits both the business and the client – businesses can easily work out the price of the project with the client without the need for in-depth data analysis or market research.

A markup percentage can then be added to ensure costs are covered while leaving enough room for profit. Clients benefit by seeing their money put to work based on the amount of time and material needed to complete a project.

Examples of Cost-based Pricing in Marketing

what is cost-based pricing in marketing?

Let’s say a digital agency is hired for a web design project. The agency will need to consider employee salaries, overhead costs, marketing objectives, the size of the agency, and other factors to determine the cost of the project. When the costs have been added up, the agency can then markup its web design services to ensure they make a healthy profit.

The same could be said for a logo design project. The agency would have to calculate the cost of the graphic designer, scope of the project, hours logged, and the markup to determine the price of the project.

What Is Value-based Pricing?

Value-oriented pricing is determined by how much value your product or service adds to your client. Businesses that use value-based pricing should consider several vital questions:

  • How much does your target consumer perceive the value of your product or service?
  • Are your customers happy?
  • Does your product/service provide a benefit?

Clients who keep marketing agencies on retainer often prefer value-based pricing. Marketing retainers are typically determined by the perceived value of the service provided. Keeping a marketing agency on retainer ensures you have access to a vast pool of marketing knowledge whenever you pick up the phone.
value based pricing model - A-OK gif
Source: Giphy

Good retainers often pay for themselves in the value they provide. There may be instances where you would use value-based pricing for marketing projects as well. This, of course, depends on the scope of the project.

Benefits of Value-based Pricing

One of the primary benefits of the value-based pricing model is that it helps you determine what price point your customers are willing to pay for your products and services. This should confirm that your customers are interested in what you have to offer in terms of value.

Also, the value-based pricing approach encourages businesses to provide higher quality products and services. Typically, businesses that sell value-based products and services will continually increase the quality of their goods, allowing them to raise their prices accordingly.

Value-based pricing requires a continuous and close relationship with your target audience. You will need to learn their needs and wants so you can provide a viable solution as you improve upon the services you already offer.

Examples of Value-based Pricing in Marketing

benefits of value-based pricing and cost-based pricing

Let’s say a full-service marketing agency notices that one of its clients struggles with digital marketing and can’t seem to find any customers. Because the full-service marketing agency provides a range of effective services (such as social media marketing services, custom web design, custom logo design, etc.), they can justifiably command a high monthly retainer.

Alternatively, let’s say you lack the skillset to rank your website on Google organically. Therefore, you keep an SEO agency on retainer so they can help you improve your search engine ranking. Businesses are typically willing to pay SEO specialists anywhere from $2,500 – $5,000 (or more) a month due to the immense value of their services.

Value-based Pricing and Cost-based Pricing – Which Is Right for Your Business?

Some say cost-based pricing is the superior pricing model, while others argue in favor of value-based pricing. While they both have their strengths, the pricing structure you decide to use will often be determined by your industry and service offerings.

No matter what pricing structure you prefer, MARION’s digital marketing agency is here to help you execute on your ongoing campaigns and marketing projects. Our team of professionals is on standby to help you succeed in your marketing endeavors.

Contact MARION today for more information or to schedule a consultation.

 

About Carey Balzer

Carey Balzer, co-founder and Managing Director of MARION, has spent the bulk of his career helping small and mid-sized businesses profitably grow their revenue and improve their sales and operational performance. Over the past 20 years he has led successful start-ups through billion-dollar organizations in the communications, technology and marketing services industries. Prior to that, he held numerous marketing and sales management roles, including VP of marketing for two Fortune 500 business services companies.

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