Download Value-based pricing seeks to set prices primarily on the

Value-based pricing seeks to set prices primarily on the value
perceived by customers rather than on the cost of the product or
historical prices.
LEARNING OBJECTIVE [ edit ]
Examine the rationale behind value based pricing as a pricing tactic
KEY POINTS [ edit ]
Value-based pricing 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 cell phones).
Although it would be nice to assume that a business has the freedom to set any price it chooses,
this is not always the case. Firms are limited by constraints such as government restrictions.
Value-based pricing is predicated upon an understanding of customer value. In many settings,
gaining this understanding requires primary research through interviews with customers and
various surveys. The results of such surveys often depict a customer's willingness to pay.
TERMS [ edit ]
consumer buying process
There are 5 stages of a consumer buying process. They are: The problem recognition stage, the
search for information, the possibility of alternative options, the choice to purchase the product,
and then finally the actual purchase of the product. This shows the complete process that a
consumer will most likely, whether recognizably or not, go through when they go to buy a
product.
willingness to pay
The willingness to pay (WTP) is the maximum amount a person would be willing to pay, sacrifice,
or exchange in order to receive a good or to avoid something undesired, such as pollution.
Give us feedback on this content: FULL TEXT [edit ]
Value-based pricing setspricesprimarily,
but not exclusively, on the value, perceived
or estimated, to the customer rather than
on the cost of the product or historical
prices. Thisstrategy focuses entirely on the
customer as a determinant of the total
price/value package. Marketers who
employ value-based pricing might use the
following definition: "It is what you think
your product is worth to that customer at
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that time." Thisimage shows the process for value based pricing .
Value based pricing
Value­based pricing focuses entirely on the customer as a determinant of the total price/value
package.
Goods that are very intensely traded (e.g., oil and other commodities) or that are sold to
highly sophisticated customers in large markets (e.g., automotive industry) usually are sold
based on cost-based pricing. Value-based pricing 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 cell
phones).
Many customer-related factors are important in value-based pricing. For example, it is
critical to understand the consumerbuying process. How important is price? When is it
considered? How is it used? Another factor is the cost of switching. Have you ever watched
the television program,"The Price is Right"? If you have, you know that most consumers have
poor price knowledge. Moreover, their knowledge of comparable prices within a product
category (e.g., ketchup is typically worse). Soprice knowledge is a relevant factor. Finally, the
marketer must assess the customers' price expectations. How much do you expect to pay for
a large pizza? Color TV? DVD? Newspaper?Swimming pool? These expectations create a
phenomenon called "sticker shock" as exhibited by gasoline, automobiles, and ATM fees.
Value-based pricing is predicated upon an understanding of customer value. In many
settings, gaining this understanding requires primary research. This may
include evaluation of customer operations and interviews with customer personnel. Survey
methods are sometimes used to determine value a customer attributes to a product or
a service. The results of such surveys often depict a customer's willingness to pay. The
principal difficulty is that the willingness of the customer to pay a certain price differs
between customers, between countries, even for the same customer in different settings
(depending on his actual and present needs), so that a true value-based pricing at all times is
impossible. Also, extreme focus on value-based pricing might leave customers with a feeling
of being exploited which is not helpful for the companies in the long run.
Although it would be nice to assume that a business has the freedom to set any price it
chooses, this is not always the case. There are a variety of constraints that prohibit such
freedom. Some constraints are formal, such as government restrictions in respect to
strategies like collusion and price-fixing. This occurs when two or more companies agree to
charge the same or very similar prices. Other constraints tend to be informal. Examples
include matching the price of competitors, a traditional price charged for a particular
product, and charging a price that covers expected costs.