Value-based pricing strategy – definition and examples
- 27 May 2021
Every brand should thoroughly understand the role of pricing strategy. For customers, the price frequently indicates what products they are dealing with. Usually, expensive items are considered high-quality ones, while cheaper products – inferior. This approach is based on the assumption that price reflects the value behind the product. That’s why, in the value-based pricing strategy, you concentrate primarily on assessing and setting the value of your products. It’s your starting point allowing you to discover optimal prices: Adequate to the product itself but also to the market. In this article, we are going to take a closer look at value-based pricing strategy and see what companies are using it to maximize profits.
Today, companies all over the world use different pricing methods. On our blog, we regularly analyze the most interesting ones. Thanks to many of them, brands can attribute value to their products. Although we can distinguish many forms of pricing, today, we are going to take a look at value-based pricing. In fact, in many instances, this strategy proves to be extremely effective. How so?
What is value-based pricing (VBP)?
In this method, the price is based on input provided by customers. We live in an age where getting consumer feedback is straightforward but also important. Sellers use e-mails, surveys, social media, and even create appropriate sections on their websites for their customers to leave reviews about the company or product.
The VBP method allows sellers to set prices based on the customers’ perceived value. With this method, brands follow the values that are important to the customers when determining the prices of their products. This method assumes that the customer is willing to pay more if the product meets their expectations. The great advantage of this strategy lies in putting the consumer first, which allows you to increase profits and attract more customers.
The value-based pricing strategy
VBP is a strategy that considers the value a given product offers to the customer. For this reason, it is the customer who decides whether the amount to be paid for a good or service is appropriate or not. In this approach, the product pricing process is completely reversed. You do not start with the costs of production or sales but assess customers’ needs, desires, and expectations.
In order to do so, brands use diverse surveys and types of research. For example, you can opt for so-called focus groups, where 10-15 people talk about your brand or product, and they share input concerning its features and price.
Willingness to pay
Companies very often simply ask consumers about the so-called WTP (willingness to pay): The amount of money they would be willing to pay for a given product. They also conduct various market experiments and research to estimate the correct amount based on user experience.
Knowing the amount of money that the consumer is willing to pay, the company can determine potential costs in the following steps and adjust the rest of the value chain to the selected prices. Thanks to this form of specifying the future price, brands can understand what value customers see in their product and its features. This is priceless knowledge that allows not only to shape prices but also to influence other marketing areas, as customers are highly involved in the processes taking place in the company.
Two examples of value-based pricing
When using VBP, sellers should emphasize the value of their product or service that customers can expect as the main factor determining the selection/purchase. These may be in particular:
- Outstanding product features and benefits for the user
- The convenience of purchase
- Attractive delivery and payment terms
To see how various brands use this pricing method, let’s look at two examples of value-based pricing:
FRITZ KOLA
The creators of the Fritz Kola brand have decided that their drink will be sold at a price twice as high as the world-famous Coca-Cola. They based their decision on the results of their research, which showed that the high price also means high quality for nearly 60% of potential customers. Moreover, for the Fritz Kola brand, VBP was combined with a limited distribution model. The product’s availability only in selected points and stores indicated that these beverages were treated as a luxurious, hard-to-reach good. And speaking about luxurious goods, premium brands frequently opt for premium pricing strategy, which is very helpful in establishing a premium, top-shelf image. Thus the products of this brand became more valuable for customers. As a result, they were willing to pay more. Today, in Germany, Fritz Kola costs around 2.6 EUR (about 3.20 USD) for a 0.33 l bottle.
APPLE
Of course, when discussing VBP, Apple cannot be ignored. This American tech company has mastered this strategy to perfection. Their pricing begins and ends in cooperation with customers. When Apple first launched their iPhone, it was priced at 599 USD. However, the feedback coming from customers was clear – the price was too high. Apple answered to these calls and dropped the price to 399 USD[1]. Plus, they offered store credit to early adopters, who paid the original price. Over the years, Apple gained an image that allowed them to increase prices (significantly) without infuriating customers. They achieved that by assuring customers that the quality of their products truly justifies the high price. As a result, today, Apple’s products are definitely top-of-the-line, with iPhones starting at 500 USD and MacBooks at 1,000 USD. Apple has become synonymous with elegant design and perfect software and hardware integration. This is the value that customers are willing to pay for, no matter how expensive Apple products are. We encourage you to read more about Apple in our case study of a skimming strategy.
Value-based pricing – pros and cons
The most important advantage of the value-based pricing method is the adoption of the attitudes and preferences of buyers as the basis for determining the price level. As a result, the brand is focused on creating the foundation taking into account the requirements of various market segments in their price decisions. In other words, it’s a typical customer-centric approach.
On the other hand, the disadvantage of this method lies in the difficulty of estimating the value perceived by buyers. In the 21st century, however, we have many different tools and means that enable producers to collect and analyze data in order to build an effective pricing strategy. In particular, value-based pricing is perfect for the fashion industry. And in the B2B setup, it’s suitable for all kinds of solutions and tools that optimize diverse business processes.
MAP/MSRP tracking
If you run a company utilizing the value-based pricing strategy and you want to make sure your distributors and partners offer your products at agreed prices, check our price and promotion tracking tool. With our help, you will be able to track the implementation of your pricing strategy by key partners and act on any possible violations. Aggregated data processed by our algorithms allows you to benchmark your channels and helps you choose the best partners for future cooperation. Find out more today:
[1]https://www.forbes.com/sites/gregpetro/2014/08/06/why-pricing-power-is-the-real-secret-to-value-investing/?sh=3ff2f5082565