Marketing
Value Based Pricing
Value-based pricing is a strategy where the price of a product or service is based on the perceived value to the customer, rather than the cost of production. This approach focuses on understanding the customer's needs and willingness to pay, and pricing the offering accordingly. By aligning the price with the value received, companies can capture more value and improve profitability.
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11 Key excerpts on "Value Based Pricing"
- Arch G. Woodside, Michael Gibbert, Francesca Golfetto, Arch G. Woodside, Michael Gibbert, Francesca Golfetto(Authors)
- 2008(Publication Date)
- Emerald Group Publishing Limited(Publisher)
5. THE VALUE OF VALUE-BASED PRICING Marketing scholars generally agree that value-based pricing is a superior approach to set prices. Monroe (2002, p. 24) : ‘‘ . . . the profit potential for having a value-oriented pricing strategy that works is far greater than with any other pricing approach’’ ( Monroe, 2002 ). Cannon and Morgan (1990) recommend perceived value pricing if profit maximization is the objective: ‘‘Perceived value pricing enables a company to select an optimal price/ volume combination’’ ( Cannon & Morgan, 1990, p. 25 ). Similarly, Value Delivery and Value-Based Pricing in Industrial Markets 407 PERCENTAGE OF COMPANIES SETTING PRICES PRIMARILY IN FUNCTION OF CUSTOMER VALUE SUMMARY OF ALL EXISTING SURVEYS: VALUE-BASED APPROACHES 29% 6% 4% 20% 1% 8% 20% 37% 12% 25% 7% 29% 1996 1999 1999 2000 2001 2001 2002 2003 2005 2006 2006 2006 Relative weight of customer value-based approaches on pricing strategy Across all surveys, the relative weight of customer-related items on pricing decisions is 17%. Fig. 4 . Influence of Customer Value-Related Elements on Pricing Decisions Over Time. SUMMARY OF MAIN PUBLISHED SURVEYS (1983-2006)ON THE ADOPTION OF DIFFERENT PRICING APPROACHES Across all surveys, pricing decisions are influenced only 17% by customer-related elements. Cost-based pricing approaches: 37% Customer value-based pricing approaches: 17% Competition-based pricing approaches: 44% Other: 3% RELATIVE IMPORTANCE OF DIFFERENT PRICING APPROACHES IN SETTING NEW PRODUCT PRICES Fig. 5 . Adoption of Different Pricing Approaches in Industrial Markets – a Summary of Published Research. ANDREAS HINTERHUBER 408 Docters, Roepel, Sun, & Tanny (2004) refer to value-based pricing as ‘‘one of the best pricing methods’’ (Docters et al., 2004, p. 16). On the other hand, as early as in the 1950s Backman (1953, p. 168) notes that ‘‘the graveyard of business is filled with the skeletons of companies that attempted to base their prices solely on costs’’.
- D.P. Warne(Author)
- 2023(Publication Date)
- Society Publishing(Publisher)
Therefore, the perceived value reflects the value that buyers are prepared to place on an item and has a direct impact on the final price paid by the consumer. Even if value pricing is not an exact science, marketing methods may be applied to establish prices. For instance, premium manufacturers solicit client input to learn how highly customers regard their driving experiences with a given car model. Consequently, dealers may now utilize value-based pricing to set the price of a car (Stein et al., 2013). 5.5.2. Essential Qualities for Value-Based Pricing Any firm that implements value pricing requires a product or service to separate itself from the competition. The product must be client-focused, which suggests that all upgrades and feature additions must be driven by user demands and desires. Naturally, if the company’s management desire to implement a value-added pricing plan, the product or service must be of the greatest quality. Examples of Value-Based Markets: The fashion company is one of the most impacted by value-based pricing, where value price computation is standard practice. Popular name-brand designers sometimes expect more costs because clients feel the brand influences their look. Furthermore, if a designer is successful in persuading an A-list celebrity to wear his or her garments to a red-carpet event, the perceived worth of the connected brand may improve. When a brand’s image suffers for whatever cause, its pricing strategy tends to revert to a cost-based pricing approach. Business Marketing Management in a Business-to-Business Context 122 Other firms vulnerable to value-based pricing methods include name-brand medications, cosmetics, and personal care goods. Value-based pricing is implemented when a product’s perceived worth is high. Products with a high level of reputation or that are wholly unique are commonly leveraged in this strategy. Designer apparel firms are well- known for employing value-based pricing.
eBook - PDF- Daniel Padgett, Andrew Loos(Authors)
- 2021(Publication Date)
- Wiley(Publisher)
Think of value-based pricing as the exact opposite of cost-based pricing. Theoretically, value-based pricing suggests the company uses the customer’s willingness to pay to determine the price of the product. In our previous exam- ple, rather than charge $35, a company using value-based pricing might offer two versions of the product, one that sold for $35 and another that sold for $45. The main advantage of value-based pricing is that the company theoretically captures the maximum profit possible by setting a price at the level the customer is willing to pay. The major disadvantage of value-based pricing is that it is difficult to implement because it is often difficult to get accurate information about the true price customers are willing to pay, even if the company does market research. Luxury products often use price to help increase perceived value for products using prestige pricing— setting a relatively high price to specifically enhance the brand image as higher value. Using value-based pricing also has the advantage of forcing the company to continually monitor and adjust to customer perceptions in the market to keep price in line with potential changes in perceived value. A second strategic decision for pricing existing products is to determine if prices will be static or dynamic. Static prices, also called fixed prices, do not fluctuate much and are relatively stable over time. Static prices provide consistency and decrease the price shopping of customers. Discount stores and some grocery chains consistently offer products at relatively lower prices that do not change much. This creates a strong value image with customers. A loaf of bread for $1.49 today in a store using static prices will have a similar price for the same item tomorrow and next 10.3 Pricing Strategy 199 week. This is also referred to as “everyday low prices” or EDLP, when a store offers consistently stable prices tied to small markups on items throughout the store (Figure 10.6).
eBook - PDF- Daniel Padgett, Andrew Loos(Authors)
- 2023(Publication Date)
- Wiley(Publisher)
For the client, it can provide the opportunity to receive a discounted rate for the services, as well as the assurance that the business will be available to provide the agreed-upon services during the retainer period. 4. Value-based pricing is a pricing model in which a business sets the price of a product or service based on the perceived value it provides to the customer. Under this model, the business determines the value that the product or service offers to the customer and sets the price based on that value, rather than on the cost of producing or delivering the product or service. This approach is based on the idea that customers are willing to pay a higher price for products or services that offer greater value to them. Value-based pricing can be used in a variety of industries and is often used for products or services that are unique, high end, or highly differentiated from those offered by competitors, such as graphic design or web development. It can be a useful approach for businesses that want to differentiate themselves in the market and position their products or services as premium offerings. However, it can also be challenging to implement, as it requires the business to accurately assess the value that its products or services offer to customers and to set prices accordingly. It is important for businesses that use value-based pricing to carefully research and understand the hourly pricing Charging customers based on how many hours it takes to provide a service, with a set price for each hour. flat-rate pricing A single price for a service, no matter how much time or resources it takes to complete. retainer-based pricing A fixed fee paid regularly (usually monthly) for ongoing services or to reserve a service provider’s time. 226 CHAPTER 10 Managing Price and Customer Cost Perceptions needs and preferences of their target customers to accurately determine the value of their products or services.
eBook - ePubPricing and Profitability Management
A Practical Guide for Business Leaders
- Julie Meehan, Mike Simonetto, Larry Montan, Chris Goodin(Authors)
- 2011(Publication Date)
- Wiley(Publisher)
Perceived value can be influenced by a host of factors beyond the obvious benefits of the product or service, including a company's reputation, competitive offerings, technological characteristics, customer service, and advertising. Value is also affected by individual assessments, such as the emotional, mental, physical, social, and cultural gains identified with the product or service. For these reasons, value can be difficult to measure and quantify.While value represents an analysis of the market, the customers, and the offering itself, pricing requires firms to make tactical and strategic decisions based on measured value and their overall business objectives. Each product price should reflect a conscious decision by the seller either to realize all of the value or to leave some of it on the table in pursuit of another goal. For example, a company could charge minimally for razors—thereby sacrificing margin—to lock in customers, market share, and the promise of future revenue from its higher-margin razor blades.In general, a pricing strategy based on the value of a product or service has the potential to achieve more revenue and higher margins than other strategies. In Figure 3.1 , two products are shown. Customers' perceived value of Product A is higher than the price at which it is offered to the market: the difference between these two figures is the unrealized value that the company has failed to capture from buyers. Product B, on the other hand, has a lower perceived value than its price. Customers presumably would not purchase the product at the offered price, resulting in missed sales opportunities. Clearly, if prices were to be aligned more closely with the perceived value of each product, then Product A would achieve higher margins and Product B would gain additional revenue.Figure 3.1 Value versus PriceA value-based pricing strategy differs from other common pricing strategies in its focus on what a customer or group of customers is buying rather than on alternative factors (see Table 3.1 ). Under cost-plus pricing, for example, a company determines its costs in providing a product or service and then applies a desired profit margin to calculate a price. While this is certainly a simple approach to pricing, it doesn't capture the potential (available) revenue or margin for the offering from each customer or customer segment. In addition, it can be fraught with errors. In many industries, calculating unit costs accurately can be difficult because they can change based on volume. With a value-based pricing strategy, on the other hand, a company begins by understanding how each customer segment values its offering and then calculates a price aimed at capturing that value (both tangible and intangible). Table 3.2
eBook - PDFVisionary Pricing
Reflections and Advances in Honor of Dan Nimer
- Gerald E. Smith, Arch G. Woodside(Authors)
- 2012(Publication Date)
- Emerald Group Publishing Limited(Publisher)
Pricing Based on Value Rather than being a purely quantitative exercise, pricing based on value is contextual and deductive. The different faces and types of value, as well as the different types of customers, prevent us from using a neat and clean for-mulaic approach to pricing if we wish our prices to be the most profitable. Moreover, because several considerations beyond value, such as corporate or portfolio strategic needs, can and should affect the final price, it is naı¨ ve to believe that a mechanical approach could ever render appropriate prices. In the end, when it comes to a product’s value, there are several key questions that must be asked and answered: In lieu of or in addition to which other products will this one be used? What are the costs and value propositions of the current alternatives? What is the incremental benefit of this product? Are there segments where the product is more or less beneficial? Which value(s) should I focus on? Who receives value from this product? Finally, what problem does this product solve, and who owns that problem? 200 E. M. (MICK) KOLASSA Every player in the market will assess the value of a product differently. In situations where a product offers significant incremental value over the current alternative, price is often a nonissue. In situations where a new product offers no discernible value over existing ones, sometimes a low price will generate sales. But often no price, however low, can salvage the product. How does value relate to price? The answer is that it helps move you closer to the final decision, but it doesn’t get you all the way there. The market in which I work the most, pharmaceuticals, provides a good canvas upon which to paint some of the problems of measuring value. Millions of dollars are spent each year on technology assessment , which is essentially an attempt to measure the economic value of medicines.
eBook - PDF- Michael V. Marn, Eric V. Roegner, Craig C. Zawada(Authors)
- 2004(Publication Date)
- Wiley(Publisher)
* * * The product/market strategy level of price management is centered entirely on customer value. The primary issue here is how to determine and man- age price/benefit positioning relative to competitors—to come up with list prices or base prices that reflect, for each market segment, the best value position for a company’s products over time. The value map was intro- duced as the core tool to help understand how the critical price/benefit tradeoff works and drives customers’ selection of suppliers. Businesses that excel at the product/market strategy level are obsessive about understanding customers. They regularly invest in research to compre- hend in detail the benefit attributes that influence customers’ buying behavior and choice of supplier. They understand the current and changing importance of each attribute and their own performance against those attributes, as well as the performance of key competitors. They sustain an equally well-informed perspective on customers’ perception of their own and their competitors’ price levels. For their most important segments, they maintain current value maps—showing the value positions of their own offerings and those of com- petitors—that are updated whenever significant market events occur. These businesses use these value maps to guide strategy by segment—for instance to adjust proactively list prices and benefit offerings, to react to competitive repositioning of price and benefits, or to determine the price po- sitioning of new products. Beyond static management of value position, they use these current value maps to understand market dynamics—to anticipate competitor reactions to their own and others’ value moves. They look into the future, create target value maps of desired competitive value positions, and then take the necessary actions over time to move themselves and to in- fluence their competitors’ movements toward those target positions.
eBook - PDF- Malcolm McDonald, Ailsa Kolsaker(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
The basic problem with any cost-based approach to pricing is that it assumes implicitly that the customers are interested in the company’s costs, whereas in reality customers are only concerned with their own costs. This can be expressed another way – customers seeks to acquire benefits and it is in order to acquire those benefits that they are prepared to pay a certain price. Seen from this perspective, the company making the price decision is faced with the need to identify the value – in the customers’ eyes – of the benefits inherent in its prod-uct. The costs of that product thus become irrelevant to the pricing decision even though they are highly pertinent to the profitability of that decision. In other words, costs determine profits , not price. BENEFITS AND PRICE Throughout this book we have suggested that in any purchase decision cus-tomers are seeking to acquire ‘benefits’. A product must bring with it the 197 CHAPTER 11 – PRICING STRATEGY promise of performing certain tasks, of solving identified problems, or even of providing specific gratifications. Thus the product is not bought for the par-ticular components or materials that go into its manufacture per se , but rather it is bought for what, as an entity, it can do. The implication of the benefit concept from a pricing point of view is that the company must first identify the benefits the customers perceive the prod-uct is offering, and then attempt to ascertain the value the customers place upon them. The key issue here is that it is customer perception that is important. It may be, for example, that two competing companies offer products that are, for all intents and purposes, technically identical, and yet one company can command a premium price. Why should this be so? It may be that additional benefits offered by one company in the way of technical advice or after-sales service are perceived to be superior to those offered by another.
eBook - PDF- Mark S. Glynn, Arch G. Woodside, Mark S. Glynn, Arch G. Woodside(Authors)
- 2009(Publication Date)
- Emerald Group Publishing Limited(Publisher)
influence on pricing strategy The literature documents a variety of buyer-related pricing constructs, including perceived value, price elasticity, willingness to pay, and segmented pricing. We begin with perceived value. The meaning of value finds its origins in classical economic theory and the notion that utility maximization is basic and fundamental to human nature ( Riley, 1988 ). Adam Smith emphasizes that individuals receive utility, or value, by using, holding, or consuming a good; or by exchanging to purchase other goods, via price ( Landreth & Colander, 1989 ). In a free market, producers compete to create incremental value for individuals by increasing productivity, by generating greater (or better) output per unit of input (see Smith & Huntsman, 1997 ). Yet, the literature defines ‘‘value’’ ambiguously and loosely in business discourse. For example, one value definition focuses on objectively (the value that buyers actually receive), subjectively (the value buyers perceive they receive), or even experientially (the value buyers perceive as weighted psychologically by the salience of different dimensions – tangible or intangible – of value). Reuter (1986) and Wind (1990) define value in terms of value-in-use that product performance drives. Shapiro and Jackson (1978) and Forbis and Mehta (1981) conceptualize value in relative terms, as the maximum amount a customer should be willing to pay, assuming full information about the product and competitive offerings. Anderson, Jain, and Chintagunta (1993, p. 5) similarly define value in business markets as the ‘‘perceived worth in monetary units of the set of economic, technical, service, and social benefits received by a customer firm in exchange for the price paid for a product offering, taking into consideration the available alternative suppliers offerings and prices.’’ Consider adopting the following view as particularly useful.
- David K. Hayes, Joshua D. Hayes, Peggy A. Hayes(Authors)
- 2021(Publication Date)
- Wiley(Publisher)
CHAPTER 3 54 Value CHAPTER OUTLINE The Role of Value in Pricing Lessons from eBay The Buyer’s Multi-view of Value The Relationship Between Quality and Price The Relationship Between Service and Price The Link Between Quality, Service, and Price The Art and Science of Strategic Pricing The Science of Data Management The Art of Insight Application THE ROLE OF VALUE IN PRICING In the previous chapter, you learned that strategic pricing is defined as “the application of data and insight to effectively match prices charged by a seller with their buyers’ perceptions of value.” In Chap- ter 1, you learned that in any successful business transaction, both the buyer and seller must achieve a profit. For buyers, a profit is the perceived benefit they receive in the transaction minus the price paid for that benefit. Many business writers use the term benefit or value to describe buyer profit, and those are useful ways to consider buyers’ gains in a buyer/seller transaction. Similarly, for sellers, the prices they charge minus the costs they incur equal their profits. In a service industry, a buyer’s profit—or value received CHAPTER HIGHLIGHTS 1. Detailed examination of how buyers utilize personal value formulas when considering a purchase. 2. Discussion of the roles of quality, service, and price in a buyer’s value formula. 3. Rationale for the use of data analysis and personal insight when implementing strategic pricing. THE ROLE OF VALUE IN PRICING 55 minus the price paid—most often results in an intangible benefit. A business’s profit, however, is a very tangible benefit, and it is easily measured monetarily.
- Donald F. Blumberg(Author)
- 2002(Publication Date)
- CRC Press(Publisher)
Our market research clearly shows the existence of a significant percentage of the market that is price insensitive. Thus, in general, the development of service prices should be driven by calculation of value in use as well as competitive and cost-plus pricing. These three price alternatives should then be compared in order to determine (1) the desirability of a price increase for the higher quality required by the targeted market segment, in order to increase revenue and profits, or (2) the desirability of maintaining a competitive price at a higher quality (dictated by the value in use) required by the market in order to gain market share. Service pricing strategies, in general, are extremely complex. The use of fixed pricing based on value in use can result in significantly higher profit margins with essentially the same service quality or a significant increase in market penetration and market share through value-in-use 232 Managing High-Tech Services Using a CRM Strategy determination of the service quality parameters portfolio required by the key vertical market segment needs for premium and quality service. In fact, considerable damage can be done if the pricing strategy is not well formulated and based upon market reality rather than gut intuition. A few examples will demonstrate this. Pricing Services Originally Given Away for Free A good example of this strategic error occurred in a company called AMP, which was a leading provider of connectors and cable. The key element that established AMP’s position in the market was the development of a system called the Amp-o-matic, which was designed to connect connectors to the cable and wiring harnesses. AMP leased these machines and, of course, serviced them, as they represented a very innovative step forward over hand assembly of wiring harnesses and connectors. AMP salesmen quickly noted that when the Amp-o-matic was down, AMP was losing highly profitable connector sales.
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