What Is Value Based Pricing ?
Value based pricing (also called customer based pricing) refers to the pricing strategy in which firms set the price of their products or services on the basis of perceived value of customers. It means the price of the product is determined according to the willingness to pay and customers' perception (how much customers think the product worth). Generally, premium and luxury brands adopt this pricing strategy. The main objective of taking this approach is to maximize profit by charging premium or high price for quality or luxury products.
In this post we are going to highlight the pros and cons of adopting value based pricing method.
Advantages Of Value Based Pricing
The main advantages of value based pricing technique are as follows:
1. Increased Profit
Because of the high perceived value of the brand, firms set premium price for their products or services. It helps to increase the profit of the company.
2. Better User Experience
Companies give emphasize on the needs, wants, preference and expectations of customers and produce high quality products as per their interests. It ensures better user experience that leads to increase in customer satisfaction and loyalty.
3. Customer Retention
Another advantage of value based pricing is that it helps to retain customers. Because of high quality products and better user experience, it helps to drive customer retention.
4. Stand Out In The Market
Value based pricing promotes product differentiation. Because of attractive design, unique features and benefits of the item, it helps the company to stand out in the market.
5. Promotes Research And Development
Value based pricing depends on the customers' perceived value. So, firms need to produce quality products to attract customers. It requires information regarding customers preferences, willingness to pay, competition in the market etc. So, it promotes research and development that helps to understand the customers' behavior and expectations.
6. Increased Brand Value
Because of increased perceived value and high price, it increases the value of the brand. It also helps to improve the image of the company.
Disadvantages Of Value Based Pricing
The main disadvantages of value based pricing method are as follows:
1. Consumes More Time And Resources
Firms need proper market research before adopting value based pricing. It consumes more time, effort and resources to gather data regarding customers need, expectations, willingness to pay etc. So, it will be difficult for small firms to apply this technique.
2. Higher Cost Of Production
Another drawback of value based pricing if that company should produce high quality products with unique features that requires high quality raw materials, specialized production process and skilled employees that increase the cost of production.
3. Not Suitable For All Products
This method is suitable only for luxury and comfort goods that have inelastic demand.
Also Read
Advantages and disadvantages of competitive pricing
Advantages and disadvantages of cost plus pricing
Advantages and disadvantages of penetration pricing
Advantages and disadvantages of premium pricing
4. Low Economies Of Scale
Because of high production cost per unit and limited output company may not be benefited of economies of scale.
5. Difficult To Set Price
It is very difficult to set fair selling price of the product or service under value based pricing system. Underpricing creates a risk of losing profit and overpricing creates a risk of losing customers.
Pros And Cons Of Value Based Pricing In Brief
Pros
* A firm can generate more earnings because of high price
* It increases customer satisfaction
* It encourages the firms to produce high quality products
* It improves brand image and value
* It helps to penetrate the market
Cons
* It is difficult task for the firm to set optimal selling price
* It is not applicable for products having elastic demand
* It increases the production costs
