Definition
Value-based price is a pricing strategy which sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer rather than according to the cost of the product or historical prices. Where it is successfully used, it will improve profitability through generating higher prices without impacting greatly on sales volumes.
Value-Based Pricing
What is ‘Value-Based Pricing’
Value-based pricing is the setting of a product or service’s price based on the benefits it provides to consumers. By contrast, cost-plus pricing is based on the amount of money it takes to produce the product.
Explaining ‘Value-Based Pricing’
A company that sells basic white cotton athletic socks would probably use cost-plus pricing, because its product does not have any special features. However, a company that sold sweat-wicking, extra-padded athletic socks could use value-based pricing and sell its socks at a higher price, because it provides something unique and valuable to athletic consumers.
Understanding Perceived Value
In the case of value-based pricing, value is not determined by simply adding up the costs of the materials and labor involved in production, along with any associated costs such as marketing and distribution. While those costs are a factor, the driving force behind the price is how highly the item is desired by the customer, an intrinsic factor that is not easy to measure numerically.
Examples of Value-Based Markets
The fashion industry is an example of a sector where value-based pricing is common. If a particular designer becomes popular, the designer can charge more for the goods they create than if they were not as popular. This same principle can apply to other markets where the idea of the consumer’s outward image may be affected by possessing the item in question. Other industries subject to value-based pricing include the automotive industry, name-brand pharmaceuticals, cosmetics and personal care.
Further Reading
- Value-based pricing and reimbursement in personalised healthcare: introduction to the basic health economics – www.mdpi.com [PDF]
- Towards value-based pricing—An integrative framework for decision making – www.sciencedirect.com [PDF]
- Convergence of decision rules for value-based pricing of new innovative drugs – www.tandfonline.com [PDF]
- Pricing strategies for information technology services: A value-based approach – ieeexplore.ieee.org [PDF]
- The value of innovation under value-based pricing – www.tandfonline.com [PDF]
- Value-based pricing for emerging gene therapies: the economic case for a higher cost-effectiveness threshold – www.jmcp.org [PDF]
- A social science of contemporary value-based accounting: economic foundations of accounting for financial instruments – www.sciencedirect.com [PDF]
- Value-based pricing for drugs: theme and variations – jamanetwork.com [PDF]
