![]() ![]() Also, differentiating the product from similar competing products may require a substantial investment. This can cause implementation costs to be more with value-based pricing, as extensive research must be done to arrive at a pricing decision. As the price level is going to be higher than a cost-plus strategy, the perceived value needs to be strong. The way that a product is marketed and perceived by consumers is especially important in a value-based pricing strategy. Execution of Value-Based Pricing Strategy The value-based pricing strategy involves guesswork and is more qualitative in nature. With cost-plus pricing or competition-based pricing, a price can be decided relatively easily by evaluating costs or the competitor’s prices. ![]() It can be very difficult to evaluate the perceived value of a product or service. Value-based pricing may not always be the best pricing strategy for a company, and implementing it can come with several obstacles. The value-based pricing strategy is used on items that demonstrate a level of perceived value much greater than the cost. The above diagram shows that a cost-plus pricing strategy adds a certain markup, making the price of the item dependent on its cost. In value-based pricing strategies, prices are always equal to or higher than in cost-plus pricing strategies. In this sense, the main determiner of price in a cost-plus pricing strategy is the cost of producing that item. In cost-plus pricing, the seller simply takes the cost of producing the good or service and adds a premium. ![]() To better understand value-based pricing, you need to understand how it differs from cost-plus pricing. The difference in pricing is reflected in the scarcity of water at the concert, and the need for concertgoers to drink water. However, you can buy the same bottle from a vending machine outside of the concert area for $1 only. For example, at a concert, bottled water may be on sale for $6. Value-based pricing is also often used when scarcity is involved. The value and price are being derived from the prestige of the artist, as well as other emotional aspects that the buyer may connect with. For example, while a famous painting may sell for millions of dollars at an auction, the cost of creating that painting is meaningless relative to the sale price. Many companies capitalize on such perception, increasing their margins greatly, while minimally reducing sales volume.Ī similar strategy may also be used when the purchasing decision is emotionally driven. While a designer shirt may cost nominally more than a non-designer shirt to produce, the status carried by the designer brand increases the perceived value of the shirt. The strategy tends to involve products that possess a certain level of prestige in ownership or are completely unique.ĭesigner apparel companies are well-known for using value-based pricing. Value-based pricing is used when the perceived value of the product is high. ![]()
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