The Value Based Pricing Strategy
Introduction.
Value based pricing primarily involves setting prices of products and services on the consumer perceived value instead of setting the price of a product or a service according to the cost of production. In the process of understanding value-based pricing it is important to note that this method is a customer focused method where companies base their pricing on how much the customer believes the service and product are worth. Mostly it is companies that offer highly valuable products and services that take advantage of this pricing method. This method of pricing most preferably applies in a market where possessions being sold enhances a customer’s self-image and as a result customer are willing to assign the products high value. Through the implementation of value-based pricing companies are able to maximize their profits and fetch maximum prices for high value products.
When implementing this method, it is important to put some factors into consideration, it is very essential for a company to resolve its competitive objectives. The introduction of B2B concept of trading has spectacularly helped in raising the value if products in various markets through value creation and capture (Aspara & Tikkanen, 2013). Many companies opt not to apply value-based pricing since the company is not aware of its own advantages and because of misalignment of company objectives. In most companies there exist a conflict between the objectives and profitability and in most cases the more the market shares a company holds the more profitable the company is. To facilitate the implementation of value-based pricing the company ought to have aligned company objectives and be aware of its advantages that make it stand out amidst competitors. This will help the company dominate and sustain its target market segment.
Secondly, it is important to have a deeper understanding of customer segmentation, there exists a lot of ways of approaching value-based pricing. The segmentation that exists between companies affects the market segment that the company is aiming for. In general terms it can be said that there are customers who will always choose the product or service with the lowest price and there are value-driven customers who are willing to pay more for products that are certainly worth the price. In the market different products are sold at different prices but selling the same product at different prices is illegal and can be termed as price discrimination (Christopher, et al., 2005). It is still possible to avoid price discrimination and still be able to charge differently on the same product through fencing and versioning. Price fencing involves a criterion which a consumer must meet in order to qualify for lower prices. Versioning and fencing are the two ways that can be used to cater for two market segments that are willing to pay different prices for the same product, this way the profitability of a company will increase.
To successfully implement value-based selling, companies have to learn to utilize pricing as a form of pain management (Paranikas, et al., 2015). In most instances’ coupons are given to customers so that they could obtain discounts on products. However, coupons cannot be issued out blindly before identifying customers that are willing to pay more while buying in large quantities. As a result of marketers trying to eliminate competition the market is now segmented in a way that each segment has its own discount level. Each market has a price for its own products but no customer pays the full amount due to price negotiations. One of the greatest challenges being faced by companies today is the issuing of many discounts without getting anything in return (Paranikas, et al., 2015). For companies to gain profits they have to utilize pricing as a tool, when customers’ requests for discounts they have to offer something in return to get discounts and lower prices. If customers do not suffer the pain of requesting for discounts then they will continue asking for discounts.
Understanding price negotiation and fear is the fourth factor to put into consideration when implementing value-based pricing. It is important for companies to understand that displaying pricing confidence is important, this will allow Sales team to sell their products confidently and believe in the price worthy value of the products and services (Liozu, 2015). Companies should strive to build pricing confidence in teams whilst showing the team on how to add more value to a product or service. In instances where the seller is not confident about the price of a product or service, commodization may occur. This occurs when the price quoted by the non-confident seller is as good or bad as those of the competitors. Customers leverage commodization to drive down the prices of a commodity during negotiations. Therefore, it is important to convince the buyer or customer that a product is not selling for a lower price when the seller fully comprehends the value and the price of the commodity.
Lastly, to fully implement the value-based strategy it is essential to address mindset change. This pricing strategy mostly involves change in mindset and the underlying mechanics of establishing a price and the sales skills that are needed to achieve the price in the market (Hinterhuber, 2004). A mindset transformation is needed in an organization for value-based pricing to work, the entire company should start thinking about selling the value instead of just selling the product. Once companies have identified the value of their products their answer to questions such as what is the value and how is the value quantified? Will be easy to answer and will be very specific for each company. Once companies have established the value of their products, they can go ahead and establish the value-pricing strategy.
The needs of a consumer are not constant, therefore; they change with time. As a a result of the changing needs of consumers the perception consumers have about certain products and services is not constant too. Marketers have to advance their researches as well as their pricing to keep the brand competitive over time (Michel, et al., 2013). Before implementing this method of pricing, it is important to conduct market research and understand if it will work in the company’s favor. The law of demand and supply states that when supply increases without the demand increasing the prices of commodities usually decreases and if demand rises with no change in supply the prices of goods and services are bound to increase. The value perception of the value-based pricing is intertwined with the availability of the product. To take the example of a movie theater, a movie theatre is in a position to charge a high amount of money for popcorns that consumer can buy at a very low price at home, this is because the demand for snacks in a theater is high, therefore, customers put a high value on the snacks.
The Fashion industry is heavily influenced by value-based pricing, typically popular named brand designers command high prices based on the consumer perception of how the brand affects their image. If a designer in the fashion industry can convince a list of celebrities to wear his/her look on the red carpet, the perceived value of the associated brand is likely to skyrocket. name-brand pharmaceuticals, and personal care and cosmetics industry are also industries that are subject to value pricing. Everlane, a US-based online clothing retailer is among one of the companies that embraced the use of value based pricing, the company is openly charging more than the production cost since the price is based on the value the customer is receiving from the item itself and the experience of purchasing from a company they can trust (McCormick, 2017). Starbucks is another company that has employed the use of value-based pricing with a focus o maximizing its profits (Dawson, 2019). The company leverages insight from customer analysis and research to formulate targeted price increases to capture a market segment of consumers who are willing to pay a higher amount of their products without driving them on off. This can be seen in Starbucks latest move that involved raising the prices of their beverages by 1% across the US. Both of these companies have enjoyed large profits following the implementation of value-based pricing strategy.
Conclusion
Value based pricing involves setting prices of products and services according to their perceived value. When implementing value-based pricing a company must consider factors such as resolving competitive objectives and learning its competitive advantages. A company must also have a deeper understanding of customer segmentation. Companies must learn to utilize pricing as a form of pain management and understand price negotiation and fear in addition to addressing mindset change in the company. Value based pricing is being implemented by companies to include, Starbucks and Everlane to maximize profits. Value based pricing is a strategy that can be leveraged by companies to increase profit and sell products at a higher value without considering factors such as cost of production.
References
Aspara, J., & Tikkanen, H. (2013). Creating novel consumer value vs. capturing value: Strategic emphases and financial performance implications. Journal of Business Research, 66(5), 593-602.
Christopher, M., & Gattorna, J. (2005). Supply chain cost management and value-based pricing. Industrial marketing management, 34(2), 115-121.
Dawson, T., 2019., “How Starbucks Uses Pricing Strategy for Profit Maximization” Retrieved from;https://www.priceintelligently.com/blog/bid/184451/how-starbucks-uses-pricing- strategy-for-profit-maximization
Hinterhuber, A. (2004). Towards value-based pricing—An integrative framework for decision making. Industrial marketing management, 33(8), 765-778.
Liozu, S. (2015). The pricing journey: The organizational transformation toward pricing excellence.
McCormick, M., 2017., “Value Based Pricing For Ecommerce Companies” retrieved from; https://blog.blackcurve.com/value-based-pricing-for-ecommerce-companies
Michel, S., & Pfäffli, P. (2013). Obstacles to Implementing Value-Based Pricing. Perspectives for Managers, (185), 1.
Paranikas, P., Whiteford, P, G., Tevelson, B., Belz, D., 2015 “How to Negotiate with Powerful Suppliers”. Retrieved from; https://hbr.org/2015/07/how-to-negotiate-with-powerful- suppliers
