Value-Based Pricing - Definition
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Value-Based Pricing Definition
Value-based pricing is a strategy that companies follow in order to establish prices on the basis of the value of the product or service that a customer perceives. On the other hand, the cost-plus pricing strategy includes manufacturing costs while ascertaining the final price. If a company introduces premium and distinctive features to its product or service, it will have a higher possibility to be benefitted from the value-based pricing approach.
A Little More on What is Value-based Pricing
The principle of value-based pricing goes well with companies that create amazing products and services in order to deliver exceptional experiences to their customers. Besides, the companies design products that directly increase the self-esteem of their customers. The perceived value is the value or worth of a product that customers are agreeing to assign, and as a result, it has a direct effect on the product price that the customers pay for buying it. Marketers follow several techniques for assigning value to a product. For instance, luxury car manufacturers ask for customer feedback that measures the perceived value of customers experiences while driving a specific vehicle. This helps sellers in assessing the price of vehicle. (Note: The concept of value-based pricing establishes prices on the basis of perceived value for a product or service, the cost-plus pricing approach considers production costs while calculating the ultimate price).
Examples of Value-Based Markets
The fashion industry, undoubtedly, highly follows the value-based pricing approach for determining price. For instance, famous fashion designers charge heavy prices from customers based on their conception of how they associate the brand with their identity or status. A famous celebrity, who wears a designers outfit to a big event, can increase the perceived value of the brand indeed. In case, the value of a brand tends to fall due to some reasons, the firms pricing policy needs to be reset to a cost-based pricing model.
References for Value-Based Pricing
Academic research for Value-Based Pricing
Customer value-based pricing strategies: why companies resist, Hinterhuber, A. (2008). Customer value-based pricing strategies: why companies resist. Journal of business strategy, 29(4), 41-50. Towards value-based pricingAn integrative framework for decision making, Hinterhuber, A. (2004). Towards value-based pricingAn integrative framework for decision making. Industrial Marketing Management, 33(8), 765-778. Supply chain cost management and value-based pricing, Christopher, M., & Gattorna, J. (2005). Supply chain cost management and value-based pricing. Industrial marketing management, 34(2), 115-121. The conceptualization of value-based pricing in industrial firms, Liozu, S. M., Hinterhuber, A., Boland, R., & Perelli, S. (2012). The conceptualization of value-based pricing in industrial firms. Journal of Revenue and Pricing Management, 11(1), 12-34. Mindful Pricing: Transforming Organizations Through Value Based Pricing, Liozu, S., Boland, D., Hinterbuber, A., & Perelli, S. (2015). Mindful Pricing: Transforming Organizations Through Value Based Pricing. In Marketing Dynamism & Sustainability: Things Change, Things Stay the Same (pp. 412-421). Springer, Cham. Value-based pricing of fed cattle: Challenges and research agenda, Schroeder, T. C., Ward, C. E., Mintert, J. R., & Peel, D. S. (1998). Value-based pricing of fed cattle: Challenges and research agenda. Review of Agricultural Economics, 20(1), 125-134. Value delivery and value-based pricing in industrial markets, Hinterhuber, A. (2008). Value delivery and value-based pricing in industrial markets. In Creating and managing superior customer value (pp. 381-448). Emerald Group Publishing Limited. Value-based pricing, Hughes, D. A. (2011). Value-based pricing. Reducing uncertainty in value-based pricing using evidence development agreements, Willis, M., Persson, U., Zoellner, Y., & Gradl, B. (2010). Reducing uncertainty in value-based pricing using evidence development agreements. Applied health economics and health policy, 8(6), 377-386. The revenue risk of value-based pricing for fed cattle: a simulation of grid vs. average pricing, Anderson, J. D., & Zeuli, K. A. (2001). The revenue risk of value-based pricing for fed cattle: a simulation of grid vs. average pricing. The International Food and Agribusiness Management Review, 4(3), 275-286.