Defining value-based pricing
Value-based pricing or value pricing is a business strategy where a company sets its pricing on a particular product on most customers' perceived value.
Naturally, a product that possesses better quality and innovation subjects more to value-based pricing than commoditized products. Commoditized items are items that are very similar to what the competitors offer.
Perceived value
A perceived value is a customer's assessment and evaluation of a product's quality over the others. It is an extent to how much a customer is willing to pay for a said product.
A customer chooses benefit over its function in a purchase. A company's Marketing strategy significantly affects a customer's perceived value on a product in the market.
Customers change how they see a product's worth, mostly if the marketing managers showcased its qualities like convenience, aesthetic, and innovativeness excellently. Let's enumerate five useful marketing strategies to increase a product's perceived value:
- The physical appearance, aesthetic value, or design
- How a product saves one's time, money, and effort
- Accessibility of the product's service
- The convenience of the location
- Effortless and multiple ways of purchasing
Value-based pricing vs. Cost-plus pricing
Customers consider how a particular product they want to purchase can enhance how they look to other people. Other companies even conduct surveys to know how excellent or satisfied customers are.
They also want to know which price to set and which area to improve next. These are effective ways to use value-based pricing. Some excellent examples include:
- Art. Art takes on different forms, but its basis on pricing usually depends on a customer's perception.
- Niche products. A paranormal device has a very high value to a paranormal expert but means very little to others. In this case, since there are only a few interested people, there will also be very few supplies. This reason is why suppliers will charge high.
- Consulting. Consultation with professionals like lawyers to solve a problem that involves lawsuits are usually expensive, but people will always be willing to pay to win.
- Medicine. People would pay a hefty amount to finance medical treatment. Sometimes, these treatments' prices are usually higher than their original cost with the knowledge that people are almost always willing to go to very far extents to save a loved one's or one's life.
- Veblen goods. Luxury items such as bags, shoes, clothes, and cars are all based on a customer's perception of value. These items improve one's self-image.
While value-based pricing focuses on a customer's perception of how much a product is worth, cost-plus pricing, on the other hand, is the sum of adding a specific price or percentage and the price of producing a single product.
It is regardless of other competitor's pricing and other external factors.
For example, a renowned fashion company spends about $100 producing a single jacket sets its price at $200. Its markup price is $100, which is 100% more than its unit cost.
This method is how cost-plus pricing works. Retailing companies use this method more often since they can customize how they put markups on top of various unit costs.
