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What is Value-Based Pricing?

A lot of nitty-gritty goes into putting a product or service into the market. There are research and development, production, and marketing as well as value based pricing. But all those are just the tip of the iceberg. Behind those major milestones are innumerable tasks that require time and resources. Naturally, businesses would like to be compensated for their efforts.

How much the company charges for the product or the service rendered directly affects this compensation. This is why pricing is important. Companies cannot just randomly assign a number in the price tag if they care about how much sales they make. They have ways to figure out how to best charge what they offer to make it palatable to the market.  

Pricing power at the hands of the consumers

Value-based pricing is a tactic where the price is pegged on how much the consumer thinks the product or service is worth. In this method, it is the consumer who determines the price. This is in contrast to cost-plus pricing, where the costs of production are computed as the basis for the final price.

An example of value-based pricing is luxury cars. Automakers rely on factors like brand reputation and customer feedback to justify their pricing. Another common example is pharmaceutical products. Medicines have a brand name and a generic version. Even though the formulation is similar, people tend to pay higher for the branded medication because they trust the product.

Advantages of Value-Based Pricing

The advantage of a value-based pricing strategy is that it can be used to have higher profits for the company. Products or services of a good reputation can charge higher and independently of how much they actually cost to produce.

Value-based pricing also tends to build a long-term relationship with its consumer base. Considering the opinion of the customers when it comes to pricing makes them feel involved. Consideration of customer feedback creates brand loyalty.

Also, value-based pricing can have the effect of increasing the value of the brand. Take, for example, black leather handbags. These products are available in many different shops. However, the prices can wildly vary. What makes a black leather handbag from the department store different from another black leather handbag from a Louis Vuitton boutique? The branded one is perceived to be more valuable, so people are willing to pay more.

Using Value-Based Pricing

However, value-based pricing does not work in all markets. For it to be an effective pricing strategy, the customers must first be willing to pay the pricing set for the product or service. This can be done in a variety of ways. A common method is a time. Companies that have been around for a long time can build their reputation as heritage brands. For new entrants in the market, they can catch the attention of consumers by offering something new and different. Niche products can do well with value-based pricing because it intrigues customers.

It may seem like value-based pricing is a lot of guesswork, but this is not the case. Although it is impossible to predict precisely how much value people assign to the product, companies that engage in value-based pricing do not just pull prices out of thin air. Companies need to have a good understanding of their target market to come up with the best figure for their final price. In this way, value-based pricing is one of the most personalized marketing tactics used by businesses. 

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