Value-Based Pricing

What Is Value-Based Pricing?

Value-based pricing is a strategy of setting prices primarily based on a consumer's perceived value of a product or service. Value pricing is customer-focused pricing, meaning companies base their pricing on how much the customer believes a product is worth.

Value-based pricing is different than "cost-plus" pricing, which factors the costs of production into the pricing calculation. Companies that offer unique or highly valuable features or services are better positioned to take advantage of the value pricing model than companies which chiefly sell commoditized items.

Understanding Value-Based Pricing

The value-based pricing principle mainly applies to markets where possessing an item enhances a customer's self-image or facilitates unparalleled life experiences. To that end, this perceived value reflects the worth of an item that consumers are willing to assign to it, and consequently directly affects the price the consumer ultimately pays.

Although pricing value is an inexact science, the price can be determined with marketing techniques. For example, luxury automakers solicit customer feedback, that effectively quantifies customers' perceived value of their experiences driving a particular car model. As a result, sellers can use the value-based pricing approach to establish a vehicle's price, going forward.

Characteristics Needed for Value-based Pricing

Any company engaged in value pricing must have a product or service that differentiates itself from the competition. The product must be customer-focused, meaning any improvements and added features should be based on the customer's wants and needs. Of course, the product or service must be of high quality if the company's executives are looking to have a value-added pricing strategy.

The company must also have open communication channels and strong relationships with its customers. In doing so, companies can obtain feedback from its customers regarding the features they're looking for as well as how much they're willing to pay.

For companies to develop a successful value-based pricing strategy, they must invest a significant amount of time with their customers to determine their wants.

Examples of Value-Based Markets

The fashion industry is one of the most heavily influenced by value-based pricing, where value price determination is standard practice. Typically, popular name-brand designers command higher prices based on consumers' perceptions of how the brand affects their image. Also, if a designer can persuade an A-list celebrity to wear his or her look to a red-carpet event, the perceived value of the associated brand can suddenly skyrocket. On the other hand, when a brand's image diminishes for any reason, the pricing strategy tends to re-conform to a cost-based pricing principle.

Other industries subject to value-based pricing models include name-brand pharmaceuticals, cosmetics, and personal care.