A Price-Value Matrix - A Cool Tool for Finding Your Just Right Pricing Strategy

In order to compete with such a wide array of business models and provide the best possible service for your shoppers, you will need to adjust your pricing strategy constantly. It is not hard to see why people get frustrated at the moment they are preparing their pricing strategy. The process can be tedious, laborious and time-consuming. There’s an easier way though – one that helps you gauge your prices efficiently in order to know if they are high or low!

This post will walk you through how a price-value matrix can help you set reasonable pricing strategies by analyzing both your costs and benefits based on an average shopper's buying behaviour.

1. What is a price-value matrix?

Let’s assume you own a coffee shop selling tea, coffee and sandwiches for about $3 each per item. What is your cost for an item to make it? This is a simple example of what a price-value matrix will look like:

For example: The cost of both the tea and coffee is $2.50 and the sandwich costs $2 (the value of the sandwich). So now we have one row. The next step is to fill in all the other rows with 4 items that sell at different prices. The next step is to analyse each of these items. You will enter the name of the item in the value column and then write down your cost per item in the cost column. This will help you see how much profit your business is making for each item. Your matrix should look something like this:

So now we have three rows with two columns. Our first row has a tea at a price of $3, our second row has coffee at a price of $3 and our third row has a sandwich that sells for $3. If we compare all three items, we will notice that they all generate profit to the business although some more than others. If we compare coffee to tea for example, we will see that coffee has a higher cost than tea and a lower price than tea. Therefore, coffee is more profitable and therefore should be sold at a higher price than tea.

The best part about this is that you can add as much rows and columns as you like (as long as they are the same length) to the matrix! For example, you could use the above information from your matrix and calculate your profit margin based on a percentage or even make an assumption of what percentage of each item will sell per day.

This is a critical and crucial tool that you should always use when creating a pricing strategy. It analyzes every aspect of your pricing strategy to maximize your profits. This helps you to make the best decisions based on your actual costs and benefits because you will be able to see a visual representation of the price of each item. Still not sure what to do with this information?

Let’s take a look at the assumptions: You’ve determined that sandwiches are one of your top-selling items, but compared to both coffee and tea, their profit margin is low compared to others. You think maybe it's time for you to increase the price on sandwiches.

The first thing you will have to do is make sure that you are able to increase the price of sandwiches. It’s not a good idea to increase the cost on an item that is already selling at a low margin, so it is important to make sure that you have room to make changes.

Let’s assume you are able to increase your price by $1. Your next step is to fill out a new matrix and see how this may affect your strategy as a whole:

The numbers in this example represent our previous profits from the first matrix but now we have added another column which represents our new profit per item. The first thing we notice is that our profit has dropped by one dollar. This is typical when increasing the cost of any item, as you would expect.

The final step is to analyze the new strategy. By increasing the price of sandwiches, you have also increased the price of coffee and tea as well in order to match them with your other items. Because we’ve increased both coffee and tea, our sales have increased by 100%! We see this on the top row where our previous profit was $1000 per day and now it has increased to $2000 per day!

This matrix really helps us understand what kind of strategy we can use with our pricing structure in order to maximize profits for the business.

2. Why you should use a price-value matrix

This is a critical and crucial tool that you should always use when creating a pricing strategy. It analyzes every aspect of your pricing strategy to maximize your profits. This helps you to make the best decisions based on your actual costs and benefits because you will be able to see a visual representation of the price of each item. Still not sure what to do with this information? Let’s take a look at the assumptions: You’ve determined that sandwiches are one of your top-selling items, but compared to both coffee and tea, their profit margin is low compared to others. You think maybe it's time for you to increase the price on sandwiches. The first thing you will have to do is make sure that you are able to increase the price of sandwiches. It’s not a good idea to increase the cost on an item that is already selling at a low margin, so it is important to make sure that you have room to make changes. Let’s assume you are able to increase your price by $1. Your next step is to fill out a new matrix and see how this may affect your strategy as a whole: The numbers in this example represent our previous profits from the first matrix but now we have added another column which represents our new profit per item. The first thing we notice is that our profit has dropped by one dollar. This is typical when increasing the cost of any item, as you would expect. The final step is to analyze the new strategy. By increasing the price of sandwiches, you have also increased the price of coffee and tea as well in order to match them with your other items. Because we’ve increased both coffee and tea, our sales have increased by 100%! We see this on the top row where our previous profit was $1000 per day and now it has increased to $2000 per day! This matrix really helps us understand what kind of strategy we can use with our pricing structure in order to maximize profits for the business.

1. How you should use a price-value matrix

There are three easy steps that you can use to quickly create your own pricing strategy. The first step is to create a price-value matrix. To do this, take the same excel spreadsheet (below) and fill out the prices for each item along the top. Put the words “price” and “value” in each cell along with your pricing structure (ex: $0.20, $6/month, etc.). The next step is to fill out your assumptions: For example, you can assume that you will be selling 1000 cups of coffee per day at the current price of $1 each. You would then multiply that by your cost per item ($1).

Conclusion

I hope that this article will help you to better understand how to create a pricing strategy that will benefit your business.

If you want to learn more about pricing strategies, I recommend checking out the book

Sign up for our email list! I hope that this article will help you to better understand how to create a pricing strategy that will benefit your business.If you want to learn more about pricing strategies, I recommend checking out the book One Hour Pricing Strategy by Regan Jones.