Value Pricing Method Explained

In the value pricing method, the price set is based on the value recognised by the customer. It is mainly a customer based pricing strategy, where price is not decided on cost of production.

It is different from cost plus pricing. In cost plus pricing, price is determined based on product price. This type of method works for the companies, who are focusing on specific needs of customers. This strategy was useful for the products which are sold on customer sentiments or emotions.

Value based strategy is used by various businesses to price their product/services. This strategy is based on the following −

• Willingness of the customer.
• Knowing the customer.
• Manufacturing the best product.

Characteristics

The characteristics of the value pricing method are as follows −

• Companies should produce customer based products.
• Products are modified according to the customer needs.
• Companies should have easy communications with customers.
• Companies should invest their time to customers to seek their feedback.

Formula

The formula for the value pricing method is as follows −

Vp = Bv + Pv

Here Vp = Value based pricing, Bv = Brand value, Pv = product value

Advantages

The advantages of the value pricing method are as follows −

• Brand value increases.
• Increase in profits.
• Loyalty of customers.
• Balancing demand and supply.

Disadvantages

The disadvantages of the value pricing method are as follows −

• Business expansion is limited (if the market is down).
• Customer base is limited.
• Market share may decrease, if the prices are high.
• Production cost is not considered.

Examples

The examples of the value pricing method are as follows −

• Services.
• Consumer goods.
• Capital goods.
• Consulting.
• Medicine.
• Luxury items.
• Seasonal products.