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Concept
Value-based pricing
Summary
Value-based price (also value optimized pricing and charging what the market will bear) is a market-driven pricing strategy which sets the price of a good or service according to its perceived or estimated value. The value that a consumer gives to a good or service, can then be defined as their willingness to pay for it (in monetary terms) or the amount of time and resources they would be willing to give up for it. For example, a painting may be priced at a higher cost than the price of a canvas and paints. If set using the value-based approach, its price will reflect factors such as age, cultural significance, and, most importantly, how much benefit the buyer is deriving. Owning an original Dalí or Picasso painting elevates the self-esteem of the buyer and hence elevates the perceived benefits of ownership.
Within the strategy of value-based pricing, the price is not dependent on its cost of production, but instead, it is set with consideration upon the consumers perceived value and willingness to pay for the good or service. This pricing strategy should have an even power balance between the seller and the buyer, maintain a long-term and service-based exchange and prioritise a strong relationship with consumers. When adopting the value-based pricing strategy, the price is set to reflect the product or services benefit, meet the company's marketing and financial goals and additionally, consider any competitors' pricing that could influence a consumers preference.
Within this method, value is considered a crucial driving force for every business decision, as ultimately, value determines the price the potential customers are willing to pay for the added benefits received. Profitability of this method stems from its ability to eliminate potential customers who are driven only by price and attract new value-oriented customers from competitors. For example, Starbucks raised prices to maximize profits from price insensitive customers who value gourmet coffee, while losing consumers who seek cheaper prices.
Official source
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