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What is Value-Based Pricing?
Value-based pricing is a pricing structure based on the ideas of value held by the consumer instead of any other factors. With this strategy, a business attempts to price its products according to what the customer believes a proper value is. Other strategies are based on the cost of the goods or on specific profit margins, but this strategy uses none of these metrics. The advantages of this approach are increased profitability, simplicity, and the ability to understand customers better.
Value-based pricing is a style of pricing utilized by many businesses in the market today. Instead of basing pricing on a specific profit margin on top of the cost of the product, the company attempts to determine how much an individual would pay for the product. This creates a situation where companies have to be very in tune with their customers.
In order to determine how much customers are willing to pay for a product, the company has to do a fair amount of research. Many times, this research will come in the form of surveys or customer panels. The company will try to see what customers think the inherent value of the product is with this research.
Companies that do not use this method of pricing could potentially be leaving profit on the table. Customers usually have an idea in their heads about how much a product should cost. When the company prices its products at this level, it will be able to optimize sales and profit margins. In some cases, companies that do not use value-based pricing will decide on a price that is different than the perceived value. When this happens, it could reduce sales volume or not capture as much profit as would have been possible with the right pricing.
One of the advantages of this pricing strategy is that it is simple to implement. The hardest part about it is the customer research. Once that is completed, the company can simply price its products. It does not have to use complicated formulas to arrive at the price of every product. This makes it easier on the company and saves time overall.
Another advantage of using value-based pricing is that the company will be able to understand its customers better. The company has to put a lot of resources into researching its customers and this often leads to profitable ideas. Value-based pricing can make a company more in sync with its customers and lead to more sales in the future.
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Discussion Comments
@indemnifyme - You know, I've heard that about diamonds, and strangely, that doesn't stop me from wanting a diamond engagement ring. I think I may just be susceptible to marketing or something.
I actually think value-based pricing is kind of sneaky. I mean, it's great for companies. But I think pricing something higher than it's actually worth just because people will pay that price is a little sleazy. But I suppose as long as people will pay the price for those specific goods, companies will keep getting away with this pricing structure.
@popcorn - I believe diamonds are probably the most famous value-based priced item. Diamonds actually aren't all that rare and shouldn't be worth as much as they are on the market.
However, certain diamond companies have a stranglehold on the market and they create scarcity on purpose. Coupled with the advertiser-invented tradition of the diamond engagement ring, this artificially drives up the price of diamonds.
@popcorn - I have my own small business and we use value-based pricing because our market is very much determined but what people think our work is worth. As far as famous companies that use value-based pricing I think you would be safe with doing some research on the topic in general, as I doubt many large companies are about to give up their pricing methods.
The project you are doing though sounds like a great start. I think your class will have a lot of fun participating in a focus group, or doing some product sampling. The more interactive you make the whole experience the better.
Does anyone know of any famous companies or brand name goods that use value-based pricing?
I am really curious about value based selling as I am currently working on a marketing project for one of my classes at school. It is a general business class, but we are touching a lot of marketing terms and strategies.
Right now I am thinking about making a mock product for my class, and going through the stages they use to arrive at value-based pricing. I think it would be a lot of fun to do some customer research and find out what people think something is worth.
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