Value-Based Pricing - Overview, How It Works, issues

Summary · Value-based pricing is a strategy for pricing goods or services that adjusts the price based on its perceived value rather than its historical price. Value-BasedPricingAstrategyforpricinggoodsorservicesthatadjuststhepricebasedonitsperceivedvalueratherthanitshistoricalpriceHome›Resources›Knowledge›Strategy›Value-BasedPricingWhatisValue-BasedPricing?Value-basedpricingisastrategyforpricinggoodsorservicesthatadjuststhepricebasedonitsperceivedvalueratherthanonitshistoricalprice.Thevalue-basedpricingstrategyisusedtoincreaserevenueSalesRevenueSalesrevenueistheincomereceivedbyacompanyfromitssalesofgoodsortheprovisionofservices. Inaccounting,theterms"sales"andbyincreasingpriceswithoutasignificanteffectonvolume.  SummaryValue-basedpricingisastrategyforpricinggoodsorservicesthatadjuststhepricebasedonitsperceivedvalueratherthanitshistoricalprice.Thestrategyisusedwhenthepurchasingdecisionisemotionally-drivenorwhenscarcityisinvolved.Valuepricingisgoingtopriceitemsatahigherlevelthancost-pluspricingbyincreasingtheperceivedvalueofthegoodorservice. WhenisValue-BasedPricingUsedValue-basedpricingisusedwhentheperceivedvalueoftheproductishigh.Thestrategytendstoinvolveproductsthatpossessacertainlevelofprestigeinownershiporarecompletelyunique.Designerapparelcompaniesarewell-knownforusingvalue-basedpricing.Whileadesignershirtmaycostnominallymorethananon-designershirttoproduce,thestatuscarriedbythedesignerbrandincreasestheperceivedvalueoftheshirt.Manycompaniescapitalizeonsuchperception,increasingtheirmarginsgreatly,whileminimallyreducingsalesvolume.Asimilarstrategymayalsobeusedwhenthepurchasingdecisionisemotionallydriven.Forexample,whileafamouspaintingmaysellformillionsofdollarsatanauction,thecostofcreatingthatpaintingismeaninglessrelativetothesaleprice.Thevalueandpricearebeingderivedfromtheprestigeoftheartist,aswellasotheremotionalaspectsthatthebuyermayconnectwith.Value-basedpricingisalsooftenusedwhenscarcityScarcityScarcity,alsoknownaspaucity,isaneconomicstermusedtorefertoagapbetweenavailabilityoflimitedresourcesandthetheoreticalisinvolved.Forexample,ataconcert,bottledwatermaybeonsalefor$6.However,youcanbuythesamebottlefromavendingmachineoutsideoftheconcertareafor$1only.Thedifferenceinpricingisreflectedinthescarcityofwaterattheconcert,andtheneedforconcertgoerstodrinkwater. Cost-PlusPricingvs.Value-BasedPricingTobetterunderstandvalue-basedpricing,youneedtounderstandhowitdiffersfromcost-pluspricing.Incost-pluspricing,thesellersimplytakesthecostofproducingthegoodorserviceandaddsapremium.Inthissense,themaindeterminerofpriceinacost-pluspricingstrategyisthecostofproducingthatitem.Invalue-basedpricingstrategies,pricesarealwaysequaltoorhigherthanincost-pluspricingstrategiesVariableCost-PlusPricingVariablecost-pluspricingisatypeofpricingmethodwhereinthesellingpriceofagivenproductisdeterminedbyaddingamarkupoverthetotalvariable.Theabovediagramshowsthatacost-pluspricingstrategyaddsacertainmarkup,makingthepriceoftheitemdependentonitscost.Thevalue-basedpricingstrategyisusedonitemsthatdemonstratealevelofperceivedvaluemuchgreaterthanthecost. IssueswithValue-BasedPricingValue-basedpricingmaynotalwaysbethebestpricingstrategyforacompany,andimplementingitcancomewithseveralobstacles.ItcanbeverydifficulttoevaluatetheperceivedvalueofaproductorserviceProductsandServicesAproductisatangibleitemthatisputonthemarketforacquisition,attention,orconsumptionwhileaserviceisanintangibleitem,whicharisesfrom.Withcost-pluspricingorcompetition-basedpricing,apricecanbedecidedrelativelyeasilybyevaluatingcostsorthecompetitor’sprices.Thevalue-basedpricingstrategyinvolvesguessworkandismorequalitativeinnature. ExecutionofValue-BasedPricingStrategyThewaythataproductismarketedandperceivedbyconsumersisespeciallyimportantinavalue-basedpricingstrategy.Asthepricelevelisgoingtobehigherthanacost-plusstrategy,theperceivedvalueneedstobestrong.Thiscancauseimplementationcoststobemorewithvalue-basedpricing,asextensiveresearchmustbedonetoarriveatapricingdecision.Also,differentiatingtheproductfromsimilarcompetingproductsmayrequireasubstantialinvestment. ExampleAssumeanindividualworksforafilmproductioncompanyandistaskedwithpricingmerchandiseforanupcomingSpidermanfilm.TheproductioncompanyownsallrightsoverSpiderman-brandedmerchandise,meaningitwon’tneedtocompetewithothercompaniesonprice.Additionally,thenewSpidermanstarsTobeyMaguire,afanfavorite.Themerchandisewouldbetheperfectcandidateforavalue-basedpricingstrategy.First,asothercompaniescan’tlegallyproducethemerchandise,youwon’tneedtoworryaboutloweringthepricetoremaincompetitive.Additionally,thefactthatTobeyMaguireisstarringinthefilmmeansthatthefansarewillingtopaymoreforthesameitem.Therefore,theperceivedvalueoftheproductincreases. MoreResourcesCFIistheofficialprovideroftheCommercialBanking&CreditAnalyst(CBCA)™ProgramPage-CBCAGetCFI'sCBCA™certificationandbecomeaCommercialBanking&CreditAnalyst.Enrollandadvanceyourcareerwithourcertificationprogramsandcourses.certificationprogram,designedtotransformanyoneintoaworld-classfinancialanalyst.Inordertohelpyoubecomeaworld-classfinancialanalystandadvanceyourcareertoyourfullestpotential,theseadditionalCFIresourceswillbeveryhelpful:4P’sofMarketing4P’sofMarketingThe“4P’sofMarketing”refertothefourkeyelementscomprisingtheprocessofmarketingaproductorservice.TheyinvolveamarketingBrandEquityBrandEquityInmarketing,brandequityreferstothevalueofabrandandisdeterminedbytheconsumer’sperceptionofthebrand.BrandequitycanbepositiveorMarketPositioningMarketPositioningMarketPositioningreferstotheabilitytoinfluenceconsumerperceptionregardingabrandorproductrelativetocompetitors.TheobjectiveofmarketOpportunityCostOpportunityCostOpportunitycostisoneofthekeyconceptsinthestudyofeconomicsandisprevalentthroughoutvariousdecision-makingprocesses.TheCFI'sCorporate&BusinessStrategyCourseLearntoperformStrategicAnalysisinCFI’sonlineBusinessStrategyCourse!Thecomprehensivecoursecoversallthemostimportanttopicsincorporatestrategy!CorporateFinanceInstituteBacktoWebsite0searchresultsfor‘’Peoplealsosearchfor:excelFreefreecoursesBalancesheetaccountingwaccIRRExploreOurCertificationsFinancialModeling&ValuationAnalyst(FMVA)®LearnmoreCommercialBanking&CreditAnalyst(CBCA)™LearnmoreCapitalMarkets&SecuritiesAnalyst(CMSA)®LearnmoreCertifiedBusinessIntelligence&DataAnalyst(BIDA)™LearnmoreResourcesExcelShortcutsPCMacListofExcelShortcuts 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