What is value-based pricing?
Value-based pricing is a standard marketing strategy where the prices of a commodity are quoted
based on the perceived value of the product or service instead of its historical value.
This strategy is mainly utilised to increase revenue by increasing the price and keeping the volume
constant. How to determine prices based on value?
The following steps will let you determine prices based on value easily:
Focus on a particular segment
The first step towards determining value-based pricing is to focus on a particular segment.
In this stage, one is advised to focus on a particular segment. A value-based pricing
strategy can only be used in the case of specific segments.
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Compare with the next best alternative
The next step towards implementing a value-based pricing strategy is to compare your product
or service with the next best alternative available in the market. This type of pricing
strategy works perfectly when there is an alternative product available in the market.
The alternative product acts as an excellent item for comparing value and determining the
price. The comparison also helps the brand to figure out the ways to improve its service
or product.
Realise the difference in value
The third step towards implementing the value-based pricing strategy is to realise the difference
in the value. In this stage, one needs to figure out the unique feature and understand
the difference between your product and your competitors' product.
Determine the price as per the perceived value
Now that you have already figured out the unique features of your product, determined
its value, and realised how it is different from your competitors, it's time for you to
determine the price of your product. This is the most vital stage in the whole price
determination process.
What are the pros and cons of value-based pricing?
The following are the pros of the value-based pricing strategy:
It develops real willingness within customers to pay the quoted price
As value-based pricing defines the right value of a product, it develops the actual willingness
of customers to pay whatever amount that the brand has quoted. If a brand can successfully
carry out its branding and defines the value of its product, it can also earn a higher
percentage of revenue that the customers would happily pay.
It enables a company to improve its quality
Another advantage of utilising the value-based pricing strategy is that it gives the brand
the opportunity to offer better quality products or services. In addition, this strategy makes
you do thorough market research before determining prices. Therefore, it becomes easier for a
brand to understand the existing alternatives in the market and helps them to deliver even
better service to its customers.
It enables brands to offer better customer service
The value-based pricing strategy enables brands to cater to the customers' needs and deliver
products or services as per their demand. This not only helps brands to offer better
customer service but also helps them to strengthen their bonding with the customers.
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The following are the cons of the value-based pricing strategy:
It is time-consuming and requires resources
One of the disadvantages of a value-based pricing strategy is that it is a highly time-consuming
process and requires resources to implement. To carry out the value-based pricing, one
needs to thoroughly do market research and survey its customers to analyse both the existing
alternatives in the market and the exact demand of the customers.
It is not applicable for all products or services
The value-based pricing strategy does not work with products that do not have competition
or alternatives already existing in the market. It is only suitable for products that are
common or saturated in the market.
Is value the only aspect to consider while determining the prices of products?
The process of determining the prices of products and services is lengthy and time-consuming.
Marketers need to focus on several factors such as competitors' products, quality, customers'
demand, etc., and differentiate their products from the competitors' before settling on a
particular price for a product.