Value-based Pricing

Definition:

Value-based pricing is a pricing strategy in which companies base their prices on the customer’s perceived value of a product or service. The idea is to differentiate prices considering the preferences of customers.

Explanation

Value-based pricing can be applied to products and services that create a certain value for the customer, such as a better customer self-image or a better customer experience. The perceived value of the product or service reflects the customer’s willingness to pay. The fashion industry is a sector where value-based pricing is being used. Well-known brands set high prices for their products because their consumers place a high value on their goods.

What to watch out for

Value-based pricing is complex. Companies must determine the value of the benefit provided to the customer and set their prices accordingly, while taking into account the prices of their competitors.

The value-based pricing strategy can be a risky pricing strategy because it depends on the product and brand as well as the customer’s perception of the product. Customer preferences and values can change over time, as can be seen in the current preferences shift towards sustainable products and diversity within the company itself and many more criteria. 

This method does not ensure profitability and optimization of your profit. 

Further reading

Value-based pricing - Investopedia