Value Based Pricing

Pricing of a product based on its value judgment is extremely important. Customer preferences, product benefits, company image, convenience and product quality are subjective criteria that will help an organization understand the customer’s perception of the value of its product or service.

What customers want is vital.

Are they saving money or time by purchasing your product? Is there a competitive advantage that they gain by using your service? What are their choices? Is it convenient for them to use your service instead of doing it themselves? What exactly does the competition demand?

The maximum price the customer will pay for the benefit received can be understood if the above points are kept in mind.

Listed below are a few value-based pricing strategies. They take into account the break-even point, but are inclusive of subjective judgments in addition to the numbers.

1. Establishing the same price as competitors - This is used when prices for a commodity product are usually well-established (like professional services), or when there are no other means to set prices. The challenge, therefore, is to figure out how to lower costs in order to produce higher profits as compared to competitors.

2. Establishing a Low Price - This is done solely to capture a large number of customers in the market concerned. This strategy is also used to gain non-financial objectives such as meeting the competition, projecting an image of being low-cost, or simply for product awareness. If profitability can be maintained at the low price, or if sales levels are acceptable, this strategy works and can later lead to the raising of prices.

3. Charging a high price - It is possible to charge a high price relative to the cost of the product if it is unique and is valuable to customers. The affluence of the target market also counts. Positioning a product as a “prestige product” in such a case would make it possible to charge a high price. For example, Rolex watches may not have that high a production cost. However, the high price brings a “status” benefit to the affluent Rolex market.

Charging the customers what they are “willing to pay”, even though it is high, is a strategy that requires alertness and intelligence. It also requires a willingness to change because customers (as well as competitors) might decide that the profits are too high. Therefore, a lot of factors influence value based pricing, but an intelligent strategist can make the most of it.