Value-based pricing

Value-based pricing is a pricing strategy which 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. Where it is successfully used, it will improve profitability through generating higher prices without impacting greatly on sales volumes.

Overview

The approach 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 mobiles). The approach however is not suitable for commodity products.

Methodology

The methodology of value-based pricing involves understanding the value of a product in the customers' eyes. This value is then used to set the product's price, rather than simply adding a margin to the cost of production.

Advantages and Disadvantages

Value-based pricing has several advantages over cost-based pricing. It allows companies to capture more value, it provides a better customer experience, and it can lead to greater customer loyalty. However, it also has some disadvantages. It can be difficult to implement, it requires a deep understanding of customer needs and perceptions, and it can lead to price discrimination.

See Also

• Pricing strategies
• Price discrimination
• Customer value

References

Value-based pricing Resources
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