Reading: Benefits of Value-Based Pricing
The Customer and the Pricing Decision
We have discussed common company objectives that affect pricing and the competitive impact on pricing. The most important perspective in the pricing process is the customer’s. Value-based pricing brings the voice of the customer into the pricing process. It bases prices primarily on the value to the customer rather than on the cost of the product or historical prices determined by competitors.
If we consider the three approaches to setting price, cost-based pricing is focused entirely on the perspective of the company, with very little concern for the customer; demand-based pricing is focused on the customer, but only as a predictor of sales; and value-based pricing focuses entirely on the customer as the determiner of the total price/value package. Marketers who employ value-based pricing might describe it this way: “Price is what you think your product is worth to that customer at that time.” This approach regards the following as marketing/price truths:
- To the customer, price is the only unpleasant part of buying.
- Price is the easiest marketing tool to copy.
- Price represents everything about the product.
Still, value-based pricing is not altruistic. It asks and answers two questions:
- What is the highest price I can charge and still make the sale?
- Am I willing to sell at that price?
In order to answer these questions we need to consider both customer- and competitor-related factors. In answering the second question, we would also want to use the break-even analysis that we discussed in the previous section, as well as other financial and strategic analyses.
Several customer-related factors are important in value-based pricing; one of them is understanding the customer buying process. For a convenience good, customers often spend little time, planning, or effort in the buying process, and purchases are more often made on impulse. With a shopping product, the consumer is more likely to compare a number of options when evaluating quality, cost, and features; as a result, he or she will require a better understanding of price in order to assess value.
Another issue is that different groups or segments of customers view price differently. Buyer personas can be instrumental to a marketer’s grasp of those differences and the role price plays in the decision-making process. Some buyers will weight convenience or quality over price, for instance, while others will be highly price sensitive.
The marketer must understand what the customer values, what the customer expects, and how the customer evaluates price in the value equation.
A second factor influencing value-based pricing is competitors. We asserted above that the primary driver of value-based pricing is the customer’s estimation of value—not costs or historical competitor prices. Still, competitors do influence the customer’s view of value. The marketing mix of competitive products have an impact on customer expectations because they an important part of the decision-making context. Customers are shopping across products and brands and take price differences into account when evaluating the quality and benefits of competitive products. These direct comparisons have tremendous impact on the customer’s perceptions of value.
In value-based pricing, the marketer must also consider indirect competitors that consumers may use as a basis for price comparisons. For example, one might use the price of a vacation as a basis for buying vacation clothes. The cost of eating out is frequently compared to the cost of groceries.
Ultimately, value-based pricing offers the following three tactical recommendations:
- Employ a segmented approach toward price that considers how each group of customers assesses value.
- Establish the highest possible price level and justify it with comparable value.
- Use price as one component in the marketing mix, building compelling value across all elements of the offering.