Value Based Pricing
INTRODUCTION
Value-based pricing is a method of pricing products in which companies first try to determine how much the products are worth to their customers. The goal is to avoid setting prices that are either too high for customers or lower than they would be willing to pay if they knew what kind of benefits they could get by using a product.
In most firms prices are determined by intuition, opinions, rules of thumb, out-right dogma, top management’s higher wisdom, or internal power fights1. Even though superior pricing capability can have a significant impact on profitability, strangely enough, few firms in business markets attempt to systematically build and leverage their pricing capability2.
Pricing consideration ought to take place at the strategy level, at the tactics level and at the level of the individual transaction. In any market we find a range of prices. Pricing strategy focuses on where within this range to position a market offering and how to shift the range itself and the supplier’s relative position within it. In contrast, pricing tactics focus on shifting the supplier’s position within the existing price range and are often transitory in nature. Finally, transaction pricing focuses on realizing the greatest net price for each individual order. The focus of this article is at the strategy level.
TRADITIONAL PRICING APPROACHES
Most firms rely on the traditional methods of cost-plus pricing or competition-based pricing.
Cost-Plus Pricing
In cost-plus pricing, based upon knowledge of their own costs, supplier managers add some percentage onto these costs to arrive at the market offering price. Businesses of all sizes tend to use this simplistic pricing model as a guideline for arriving at sale prices that will allow the company to cover all costs associated with the production and sale of the products, and still make a reasonable profit from the effort. The ultimate goal of cost-plus pricing is to allow the originator of a good
Value-based pricing is a method of pricing products in which companies first try to determine how much the products are worth to their customers. The goal is to avoid setting prices that are either too high for customers or lower than they would be willing to pay if they knew what kind of benefits they could get by using a product.
In most firms prices are determined by intuition, opinions, rules of thumb, out-right dogma, top management’s higher wisdom, or internal power fights1. Even though superior pricing capability can have a significant impact on profitability, strangely enough, few firms in business markets attempt to systematically build and leverage their pricing capability2.
Pricing consideration ought to take place at the strategy level, at the tactics level and at the level of the individual transaction. In any market we find a range of prices. Pricing strategy focuses on where within this range to position a market offering and how to shift the range itself and the supplier’s relative position within it. In contrast, pricing tactics focus on shifting the supplier’s position within the existing price range and are often transitory in nature. Finally, transaction pricing focuses on realizing the greatest net price for each individual order. The focus of this article is at the strategy level.
TRADITIONAL PRICING APPROACHES
Most firms rely on the traditional methods of cost-plus pricing or competition-based pricing.
Cost-Plus Pricing
In cost-plus pricing, based upon knowledge of their own costs, supplier managers add some percentage onto these costs to arrive at the market offering price. Businesses of all sizes tend to use this simplistic pricing model as a guideline for arriving at sale prices that will allow the company to cover all costs associated with the production and sale of the products, and still make a reasonable profit from the effort. The ultimate goal of cost-plus pricing is to allow the originator of a good