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.
Perceived value in Pricing
When we talk about the perceived value of an item, it simply means the value of an item a consumer has in his/her mind. This is what affects the price a consumer is willing to pay. In this case, the value becomes the most important aspect and a driving force in every business as it affects the price and willingness to pay. Markets dealing with luxurious items like vehicles mostly use the value-based pricing approach. Manufacturers gather feedback from the clients on experience and features, use this information to come up with a more innovative brand which increases the value and benefit as perceived by the customer. There must be some benefits and values attached to the item for the customer to pay for a higher price willingly. For example, two companies could be selling the same type of an item, one on cost-plus pricing while the other on value-based pricing technique. The company selling on value-based pricing should come up with a more innovative way and exciting way of using that item which the other competitor doesnt offer. A product with unique benefit gets an advantage over competitor products, and therefore can be sold on value-based pricing. This is because prices are controlled by the value of the benefits the business offers to its customer. At the same time, the price that the competitors charge should also be considered. In order to maximize the profitability of the products and services, the business needs to quantify the benefits the products offer to their customers and also review customers buying decision principles and maximize on that. Prices set on value-based pricing are always higher or equal to the prices set from cost-plus pricing. If by any case the prices are lower, the customer perceives the value of that product lower than the cost incurred plus the profit margin. A company setting prices based on value pricing attracts a certain segment of customers. The company may lose some potential customers who are motivated by prices and may also attract new customers from their competitors who are motivated by the value the product offers.
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.