In the 1980s, Richard Thaler, the godfather of behavioural economics, came out with the Beer on the Beach Experiment and found that people on a beach were willing to pay more for a cold beer purchased from a five-star hotel than from a rundown grocery store. This goes against what traditional economics believe that, regardless of where the bottle of beer is sold, a customer’s willingness to pay for a product–in this case, a bottle of beer–is the same for both the five-star hotel and the rundown grocery store similar approach with good value pricing.
This experiment came to be the basis for value-based pricing, a pricing strategy based on a consumer’s perceived value for a product or a service. Under this strategy, business owners base their pricing method on how much a customer believes a product or a service is worth.
There are two distinct forms of value-based pricing: good value pricing and value-added pricing.
What is this pricing strategy?
Because of changing economic conditions and consumer price perceptions, business owners have responded by offering goods and services at lower prices through this strategy.
It is a form of value-based pricing that offers good quality and good service at a fair price. This is often used for introducing less-expensive versions of goods or services from established businesses. This pricing strategy appeals to customers who are on a tight budget and are only willing to pay a lower price; these customers won’t get the same value compared to regular-priced products but are instead paying for a product that matches the amount they paid.
One great example of a business that uses this pricing strategy is budget airlines that offer low-cost airfares for those who want to travel but are willing to skip premium services from most airlines, like in-flight meals and travel suites. Instead, for what they pay for in budget airlines, they are offered comfortable seats and choices to skip in-flight meals for lower prices.
Good Value Pricing vs Value-Added Pricing
While the main pricing strategy aims to keep prices less expensive, the opposite goes for value-added pricing. Value-added pricing simply means attaching value-added features and services to differentiate the final product and, in the end, having the power to charge higher prices for the final product.
Value-added pricing is a common response from business owners who find matching a competitor’s lower-priced products dangerous. This is because lowering the prices tend to cheapen products and services in the minds of customers, and tend to reduce the seller’s power to maintain profitable prices in the long run. For this reason, most business owners who are undercut by a competitor’s lower price respond with this strategy.
The goal of value-added pricing is not to lower the price to match a competitor but to attach value-added features to their product to differentiate it from what the competitor offers. These value-added features will give customers products and services that are of higher value, and will also now give business owners the power to keep their prices or charge customers a higher price compared to their competitors.
A great example of value-added pricing can be observed in premium airlines. While their airfares cost a lot more compared to low-cost airlines, passengers who choose to pay for their airfares are willing to shoulder the additional cost because of their product’s high value. Premium airlines add comfort, luxury, and premium service to their passengers. These value-added items now justify the higher price to a customer, without the airline having to lower their airfare prices to match their competitors.
Value-based pricing is a strategy that helps business owners come up with reasonable prices for their goods and services based on the customers’ value for them.
There are two distinct forms of value-based pricing: good value pricing and value-added pricing. The first pricing strategy is coming up with budget-friendly versions of their products in order to make the prices more customer-friendly. On the other hand, value-added pricing is coming up with products with value-added features in order to increase the product’s value without having to match a competitor’s lower prices.