Value based pricing is the method of setting the prices of the products depending on their benefits provided to the customers. The main aim of this pricing method is to avoid the prices that are too high or lower than the customers are willing to pay for the product or service. Unlike the cost plus pricing , where the price is determined by the costs, the value based pricing entirely depends on the worth of the products or the services.
Identification of the Pricing Model
For arriving at the optimum price, the value of the product and the price of the customers are identified. Some factors are examined such as whether the customers are willing to save their money or time during their purchase, whether the products or the services can gain competitive advantage. The answers will help you to identify the actual value of the products or service and therefore their actual price.
Benefits of Value Based Pricing
There can be various advantages of applying the value based pricing method in your business:
- Customer Loyalty: Though high prices are being charged, you can expect a high level of customer loyalty in this method. If the product or service is justified with the price then various referrals and repeat businesses can be obtained. The sales relationship with the customers should be very trusting and close before implementing the value based pricing.
- Profit Increment: This method can demand the highest possible profit margin in the products or the services. The profit maximization can therefore be considered as one of the advantages of the value based pricing.
Risks of Value Based Pricing
Here, you will find some risks of implementing the value based pricing:
- Labor Costs: The labor costs become highly expensive as you are providing with high end skill sets in your end results. There lies a risk of high attrition rates when the employees start leaving the firms for competing with their unique skill sets.
- Niche Market: The high prices of the products and the services can only be targeted to a niche market and is only acceptable to smaller numbers of the customers. Some potential customers may also leave by noticing the high prices.
- on-Scalable: The method works best for the smaller organizations which are specialized in particular products or services. In the large organizations, the skill levels of all the employees may not be so high.
- Competition: When the company is applying the high value price in its products or services with the help of value based pricing method , it is actually allowing enough room for its competitors to set prices lower than them and gain the market share easily.
Therefore, this pricing method entirely depends on the customers on determining the prices. It is the method which can only gain exceptional profits in the niche market. The companies will be well known for offering premium services to the high valued customers only. It cannot be applied in the businesses where the normal competitive pressures are present and value based pricing will therefore cannot be implemented.