Value-based pricing
Value-based pricing, or value optimized pricing, is a pricing strategy. It sets prices primarily, but not exclusively, on the value, perceived or estimated, to the customer rather than on the cost of the product or historical prices.[1][2]
Goods that are very intensely traded (e.g. oil and other commodities) or that are sold to highly sophisticated customers in large markets (e.g. automotive industry) usually are sold based on cost-based pricing. Value-based-pricing is most successful when products are sold based on emotions (fashion), in niche markets, in shortages (e.g. drinks at open air festival at a hot summer day) or for indispensable add-ons (e.g. printer cartridges, headsets for cell phones).
Long term, by definition, prices based on value-based pricing are always higher or equal to the prices derived from cost-based pricing (if they were lower, it would mean that the actual value perceived by the customer is lower than the costs of producing the good plus a profit margin, meaning that companies would long term not be interested to produce and sell at that price).
Value-based pricing is predicated upon an understanding of customer value. In many settings, gaining this understanding requires primary research. This may include evaluation of customer operations and interviews with customer personnel. Survey methods are sometimes used to determine value a customer attributes to a product or a service. The results of such surveys often depict a customer's 'willingness to pay.'
Value-based pricing is something like the holy grail of pricing as is evidenced by the expansive literature on this topic (see Amazon). The principal difficulty is that the willingness of the customer to pay a certain price differs between customers, between countries, even for the same customer in different settings (depending on his actual and present needs) so that a true value-based pricing at all times is impossible. Also, extreme focus on value-based pricing might leave customers with a feeling of being exploited which is not helpful for the companies in the long run.
Frameworks for value-based pricing include amongst others Economic Value Estimation,[3] Relative Attribute Positioning, Van Westendorp Price Sensitively Meter and Conjoint Analysis.
However, despite being difficult in implementation, any production and any market positioning should have a consideration of the value the product brings to the customer at the very early stages of product development and is, in fact, employed by many companies.[4]
See also [edit]
References [edit]
- ^ "Price your product or service: Cost-plus versus value-based pricing". Retrieved 2012-08-07.
- ^ Information Rules: A Strategic Guide to the Network Economy (Google eBook), Carl Shapiro and Hal R. Varian. Retrieved 2012-08-07.
- ^ Nagle, T.; Hogan, J. (2005). The Strategy and Tactics of Pricing, 4th Edition. Prentice Hall.
- ^ "Engineering New-Product Success: The New Product Pricing Process at Emerson, Jerry Bernstein and David Macias". Retrieved 2012-07-08.
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