Value Based Pricing

Industrial Marketing Management 33 (2004) 765 – 778

Towards value-based pricing—An integrative framework for decision making
Andreas Hinterhuber*
Falkstrasse 16, 6020 Innsbruck, Austria Received 1 April 2003; accepted 18 October 2003 Available online 23 December 2003

Abstract Despite a recent surge of interest, the subject of pricing in general and value-based pricing in particular has received little academic investigation. Yet, pricing has a huge impact on financial results, both in absolute terms and relative to other instruments of the marketing mix. The objective of this paper is to present a comprehensive framework for pricing decisions which considers all relevant dimensions and elements for profitable and sustainable pricing decisions. The theoretical framework is useful for guiding new product pricing decisions as well as for implementing price-repositioning strategies for existing products. The practical application of this framework is illustrated by a case study involving the pricing decision for a major product launch at a global chemical company. D 2003 Elsevier Inc. All rights reserved.
Keywords: Value-based pricing; Cost volume profit; Economic value analysis

1. Introduction Pricing is an important and largely neglected tool in industrial marketing—on average, a 5% price increase leads to a 22% improvement in operating profits—far more than other tools of operational management. On the other hand, the subject of pricing has received far less attention than other aspects of marketing, from both practitioners as well as academic scholars. In this paper, an integrative framework for pricing decisions is presented. Based on economic value analysis, cost volume profit (CVP) analysis, and competitive analysis, it is shown how to determine and implement profitable pricing decisions. Several examples illustrate how to use the pricing methodology presented in this paper to improve firm profitability.

2. Pricing in today’s theory and practice

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