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Value Based Pricing

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Value Based Pricing

A pair of Yeezy's by Adidas cost only $76 to manufacture. However, if you were to buy them, you would have to pay around $350. That's because Adidas uses a value-based pricing strategy. What is a value-based pricing strategy? How does it work? And why does it allow companies to charge way above their production cost?

You'll find out the answers to these questions and much more by getting to the bottom of this explanation!

Value-Based Pricing Definition

The value-based pricing definition is based on the customer's judgment of whether or not the price of a product is reasonable. Pricing considerations, like any other marketing mix decisions, need to begin with the value provided to customers.

When consumers purchase something, they are exchanging something of value (the purchase price) in return for something else of matter (the commodity itself or the benefits of having or using the product).

To effectively price a product with the customer in mind, it is necessary first to determine how much value customers place on the advantages they get from the product and then establish a price that reflects that value.

Value-based pricing refers to setting the price of goods and services based on how much value the customer attaches to them rather than the cost of production.

The notion of pricing based on value is most often used in marketplaces where purchasing a product may positively affect a consumer's perception of themselves or open doors to previously unattainable life experiences. Therefore, this perceived value indicates the worth customers are prepared to ascribe to an item. As a result, it directly impacts the price consumers eventually pay for the product.

Quantifying customers' perceived values and attaching a price to them is not an exact science; companies may establish a price via marketing strategies.

For instance, luxury automakers often request consumer feedback, which allows them to properly quantify customers' perceived value of their experiences when driving a specific vehicle model. Consequently, sellers will be able to apply the value-based pricing strategy in the future to determine a car's price.

Two Types of Value-Based Pricing

The two types of value-based pricing include good-value pricing and value-added pricing.

Value-based Pricing: Good-value pricing

As customers' economic conditions and living standards change, the value they attach to certain products or services also changes. This, in turn, has cost many businesses to adjust their pricing strategies in line with the changing economic circumstances and the shifting views of value held by consumers. Good-value pricing is a technique that is becoming more popular among marketers. This approach entails providing the appropriate balance of quality and service at an affordable price.

Good-value pricing refers to offering a combination of goods and services at a fair price.

The concept of good-value pricing is subjective since even luxury firms may provide more affordable variants of their products.

In other situations, delivering good value requires reworking existing brands to provide a higher quality product for the same price or the same quality product for a lower price. Some successful businesses can thrive by providing less value while charging cheap costs.

Value-based Pricing: Value-added pricing

Pricing based on value is not the same as just charging the amount consumers are willing to pay or lowering prices to remain competitive. Instead, several businesses have begun to use value-added pricing techniques.

Instead of reducing their pricing to match their rivals, they separate themselves from the competition by including more outstanding quality, service, and value-added features in their offerings. This allows them to charge higher costs.

Value-added pricing refers to attaching additional features and services to a business's offering and charging higher prices.

A value-added feature may include giving away one year of free technical help when purchasing a new computer, for instance. This added value could contribute to more consumers purchasing from this company.

Value-Based Pricing Example

The fashion industry is a typical value-based pricing example. In the fashion industry, it is common practice to determine prices based on value. In most cases, well-known name-brand designers can charge higher prices because buyers have the notion that the brand affects the consumer's image.

In addition, the perceived worth of the connected brand might suddenly rise if a designer successfully convinces an A-list celebrity to wear their look to an event on the red carpet.

Conversely, when a brand's image declines, the pricing strategy tends to re-conform to a cost-based pricing concept. This change may happen for a variety of reasons.

The Adidas Yeezy shoes by Kanye West cost only $76 to manufacture. However, Adidas is capable of selling them for at least $350.1 The reason is that customers attach an additional $264 to Yeezy sneakers. That might be because Yeezys are seen as trending and valuable.

The Tech industry, pharmaceuticals, cosmetics, and personal care products are other businesses included in the scope of value-based pricing strategies.

Value-based pricing Fig 1. Apple DevicesFig. 1. Apple Devices

Apple is a typical example of value-based pricing. The technology corporation has perfected the skill of setting prices far higher than their actual cost of production.

In the company's early days, its price reflected the straightforward nature of its goods and the convenience with which the end user could use them. This pricing strategy was an effort to build up a market share and a base of loyal consumers, in addition to accumulating a significant amount of customer value over many years.

Today, Apple can sell an iPhone 13 Pro (the latest version) for between $1,099 and $1,449, while it costs only $570 to make.2

Value-Based Pricing Strategy

Pricing determined by the customer's perceived value is the primary factor in using a value-based pricing strategy. Under the value-based pricing model, the marketer cannot create the marketing program before deciding on the price.

Although expenses are a significant factor in determining prices, cost-based pricing is often determined by the product sold. The company first develops what it believes to be a quality product, then calculates the total cost of producing it, and then decides on a price that accounts for those expenses and the desired profit level.

After that, it is up to marketing to persuade customers that the product's value at that price justifies their decision to purchase it. If the price turns out to be too high, the firm will have to settle for lower markups or fewer sales, resulting in unsatisfactory profits.

It is the opposite when it comes to pricing based on value. The firm begins by analyzing the requirements and opinions of value held by customers. After that, it establishes its target pricing based on the value that the customers place on the product.

The targeted value and price drive decisions on expenses and product design. As a consequence, pricing starts with an analysis of customer demands and value perceptions, and prices are later determined to be proportionate to the perceived value.

Trying to determine the value consumers place on a product can be challenging for a business.

For instance, determining the amount of money spent on the various components of a dish served at an upscale restaurant is not too difficult. It is, however, challenging to value other aspects considered enjoyment indicators, such as flavor, atmosphere, relaxation, discussion, and social standing.

This kind of value is subjective; it differs not just between various customers but also between different circumstances.

Still, customers will factor in these perceived values when determining the appropriate pricing for a product; therefore, the business must make an effort to quantify them.

Occasionally, companies will ask customers how much they would pay for an actual product in addition to the cost of each additional feature added to the offer.

Cons of Value-Based Pricing

As it is challenging to quantify the value customers attach to a product, value-based pricing has some cons. Although there are companies that enjoy large profit margins by using a value-based pricing model, it is not always as advantageous.

One of the cons of value-based pricing is niche markets. If there is a market for luxury goods, then businesses selling such goods have the potential to make significant profits. Nevertheless, compared to other markets, the demographic these products are intended for is far narrower. If a firm sells suits for $200 each, they will move a lot more units than a custom tailor selling outfits for $3,000.

Another con of value-based pricing is the competition faced. Because of the limited number of potential buyers in a niche market, there is sure to be greater competitiveness in the industry. Even losing one client to a competitor may be a massive setback for the business when there are so few clients.

Value-based pricing - Key takeaways

  • Value-based pricing refers to setting the price of goods and services based on how much value the customer attaches to them rather than the cost of production.
  • Two types of value-based pricing include good-value pricing and value-added pricing.
  • Good-value pricing refers to offering a combination of goods and services at a fair price.
  • Value-added pricing refers to attaching additional features and services to a business's offering and charging higher prices.
  • Pricing determined by the customer's perceived value is the primary factor in using a value-based pricing strategy.

References

  1. Sneakerbardetroit. Here's the Production Cost for a Pair of adidas Yeezys https://sneakerbardetroit.com/production-costs-for-the-adidas-yeezys/
  2. Applescoop. The iPhone 13 Pro costs Apple only $570 to manufacture https://applescoop.org/story/the-iphone-13-pro-costs-apple-only-570-to-manufacture
  3. Fig 1. - Apple Devices, (https://commons.wikimedia.org/wiki/File:Apple_Devices_(cropped).jpg) by Gabriel Freytez is licensed by Creative Commons CC0 1.0 Universal Public Domain Dedication ( https://creativecommons.org/publicdomain/zero/1.0/deed.en)

Frequently Asked Questions about Value Based Pricing

Value-based pricing refers to setting the price of goods and services based on how much value the customer attaches to them rather than the cost of production.

The second step in value-based pricing is competitive analysis.

The first step in value-based pricing is determining the target group and the price they are willing to pay.

To calculate value-based pricing, the firm begins by analyzing the requirements and opinions of value held by customers. After that, it establishes its target pricing based on how much value it brings customers.

Value based pricing is implemented by keeping in mind how much a customer thinks that the product is worth.

Final Value Based Pricing Quiz

Question

What is value-based pricing?

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Answer

Value-based pricing refers to setting the price of goods and services based on how much value the customer attaches to them rather than the cost of production.

Show question

Question

________ refers to setting the price of a product or a service based on how much value the customer attaches to it rather than the cost of production

Show answer

Answer

Value-based pricing

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Question

The value-based pricing definition is based on the customer's judgment of whether or not the price of a product is reasonable. 

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Answer

True

Show question

Question

What are common marketplaces where value-based pricing is used?

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Answer

The notion of pricing based on value is most often used in marketplaces where purchasing a product may positively affect a consumer's perception of themselves or open doors to previously unattainable life experiences. 

Show question

Question

Luxury automakers asking for customer feedback and setting prices accordingly is an example of ________? 

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Answer

Value-based pricing

Show question

Question

What are the two main types of value-based pricing?

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Answer

Two types of value-based pricing include good-value pricing and value-added pricing.

Show question

Question

__________ refers to the offering of a combination of goods and services at a fair price.


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Answer

Good-value pricing 

Show question

Question

___________ refers to attaching additional features and services to a business's offering and charging higher prices.

Show answer

Answer

Value-added pricing

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Question

A company giving away one year of free technical help for purchasing a new computer, uses ____________.

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Answer

Value-added pricing

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Question

Good value pricing entails providing the appropriate balance of quality and service at an affordable price.


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Answer

True

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Question

What is a common example of value-based pricing

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Answer

Fashion industry

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Question

Which one of the following is not an example of value-based pricing?

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Answer

Grocery stores

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Question

Name two examples of companies using value-based pricing.

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Answer

Gucci and Apple

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Question

The Adidas Yeezy shoes by Kanye West cost only $76 to be made. However, Adidas is capable of selling them for at least $350. The reason for that is ________ ?

Show answer

Answer

Value-based pricing

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Question

What are two main cons of value based pricing?

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Answer

Niche markets and competition.

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