Value based Pricing

 

Value-based pricing is a pricing model defined by a simple fact of capitalist life: A product costs as much as people are willing to pay for it. Leveraging the strategy is a matter of understanding where that phenomenon leaves your offering and leaning into how consumers perceive it.

 

Meaning:

Value-based pricing is a pricing strategy used by businesses to charge products and services at a rate they believe consumers are willing to pay. As opposed to calculating production costs and applying a standard markup, businesses instead gauge the perceived value to the customer and charge accordingly.

 

Artwork, cars, amusement parks, and even social media influencers use value-based pricing to sell their products and services. All three of these industries take into account a few standard truths about value-based pricing:

1.      The market influences how much a consumer will be willing to pay for a product.

2.      The benefit that the product provides to the customer influences the value of that product.

3.      Competitors’ pricing can influence how valuable consumers perceive a product to be.

After taking into account these universal truths, companies then apply value-based pricing depending on their goals or the state of their industry. It's used in a few different scenarios:

·         Recognizing inelastic demand, where the need for the product is so high that a lower price would have little-to-no impact on unit sales.

·         Highly competitive and price-sensitive markets, since the level of competition usually settles at the price where consumers are willing to pay, and charging more could turn away interested buyers looking for a good deal.

·         Promoting prestige, where markups will be higher-than-usual to denote the exclusivity and grandeur of the product.

·         Selling companions and add-ons to other products that enhance their functionality, like a new charger for your cell phone or laptop if your old one breaks.

 

For lower-priced products, value-based pricing is similar to competition-based pricing, while for those higher-priced products, the model shares a lot in common with prestige pricing.

 

Because value-based pricing thrives in the grey area of sales, one major factor that consumers must consider is negotiation. Consumers and sales reps should have a conversation to determine the benefits and value that a product has in order for the consumer to pay a price that reflects the value they’ve placed on the product and for the seller to make a reasonable profit on the deal.

 

Value-Based Pricing Strategy:

Value-based pricing thrives in the grey area of sales. In turn, there are some major factors any seller needs to take into account when leveraging the value-based pricing model. Let's take a look at three of the most important ones.

Scarcity

The value-based pricing model works best when applied to unique, higher-value products. Commoditized products exist in a "sea of same" — where alternatives are often too fundamentally similar to lend themselves to different value perceptions.

Differentiation

This point is essentially an extension of the one above — if you want to leverage a value-based pricing strategy, you need to be able to justify it. That generally starts with you demonstrating that there's a notable difference between you and your competition.

Perceived value has to have some kind of basis. If you're selling batteries, you can't expect to offer a product with the fifth longest lifespan and reliably sell it at an industry-leading premium. Prospects tend to only pay value-based prices for particularly valuable products — if you want to leverage this kind of strategy you need to be able to produce, identify, articulate, and project legitimate value when it comes to your offering.

Segmentation

Market segmentation is an important element to consider when piecing together an effective value-based marketing strategy. The model generally isn't applied indiscriminately. Not everyone is willing to pay value-based prices — so you need to pin down who will be receptive to your strategy and determine how to best appeal to them.

 

Three Ways to Set Your Value-Based Price:

Value-based pricing requires a few extra steps to set a final selling price. While some pricing strategies, like cost-plus, are relatively straightforward, there are considerations to take into account when arriving at your ultimate price tag.

 

1. Analyze your customers

2. Analyze your total addressable market

3. Conduct a competitive analysis

 

PRADEEPKUMAR R (20UCM077)

SHYAM PRASANTH A (20UCM090)

III B.Com ‘B’