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Customer Value-based Pricing – Pricing based on Customer Value

What is 'Customer-Driven Pricing'

❶This is often said that fear is the most expensive feeling in a company. Then, we have to set a price that captures this value.

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Setting Prices Based on Customer Value
BREAKING DOWN 'Customer-Driven Pricing'
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Therefore, the marketer cannot design a product and marketing programme and afterwards set the price. Instead, price is an integral part of the marketing mix — it is determined before the marketing programme is set. In customer value-based pricing, the company first assesses customer needs and value perceptions. After that, it sets a target price, based entirely on customer perceptions of value. The targeted value and price will then drive decisions about what costs the firm can incur, as well as about the resulting product design.

The customer value-based pricing process is illustrated below. Certainly, measuring the value customers will attach to a product is not a simple task. Well, calculating the cost of ingredients in a meal is relatively easy.

But assigning values to other satisfactions such as taste, environment, relaxation, conversation and status is quite challenging. The reason is that these values are subjective: So we must work on measuring them. Ways to do so include asking consumers how much they would be willing to pay for a basic product and for each benefit added to the offer.

Also, the company might conduct experiments to test the perceived value or different product offers. Good-value pricing is the first customer value-based pricing strategy. It refers to offering the right combination of quality and good service at a fair price — fair in terms of the relation between price and delivered customer value.

Good-value pricing is mainly used for less-expensive products, for instance for less-expensive versions of established, brand-name products. Even companies such as Ryanair can be considered to rely on good-value pricing. Granted, they offer much less value — but at even lower prices. Value-added pricing, an alternative customer value-based pricing strategy, means attaching value-added features and services to differentiate the product and charging higher prices.

In other words, you add features and thereby customer value — and in return you charge more for the value-added product.

Hence, to implement value-based pricing into a company, the company has to understand its objective and the advantages that stand out among the competitors in the same field. Thus, this will provide a benefit of dominating the targeted market for the company, hence, sustaining the segmented customers that the company is targeting.

There are many ways of approaching value-based pricing. However, segmentation between companies decides and affects which segment of customer the company is attracting or aiming for.

Generally diving segments, there are customers who just go for the lowest price product, or value buyers who are willing to pay more to purchase products that worth the price. Thus, types of segmentation like value buyers are value—based pricing companies aiming for. In reality, each and every product in the market is sold in different prices, for more or less similar product, however, charging the same product different prices are often illegal, because it is known as price discrimination or treated as unfair.

For example, if customer A and customer B purchased the same item but charged at different prices, this is perceived as unfair. Hence, two of the strategies to go around the market and still to charge more from one segment than another are price fencing and versioning. Price fences are criteria which customers must meet if they are to qualify for a lower price [10] e. A convenience buyer only goes to a store and purchase the product they want to get in full price.

However, price buyer wants a low price, so they would clip out the coupon they got from the newspaper and redeem the coupon in the department store for a discount. Thus, fencing and versioning are just the ways of how we can address different segments with the willingness to pay at different price point.

By capturing the willingness to pay from price buyers with a low-end offering, and at the same also segmenting convenience buyer. Thus, companies are able to charge a much higher price in convenience buyer segment, so profit increases by serving different segments in different price points.

However, coupons cannot be given out blindly before understanding which customers are willing to pay more when buying in large quantities. Periodically, some marketers have eliminated their competitors by driving down cost or developing upsetting technologies Paranikas, Whiteford, Tevelson and Belz, Although market has a list price but no one ever pays the full list price, in fact, price negotiation turns into discount negotiation. For instance, the biggest challenge faced by market nowadays is giving too many discounts without getting anything in return.

This proven that pricing is often a pain management, where when customer ask for discount or to purchase a product in lower price, customers have to give something back in return to get lower price or discounts. Hence, every discount should have a pain associated with it, because if customers do not suffer from the pain for asking to get a discount, they will just ask for more discounts.

Price management and price psychology is related from one to another. For example, when buyer knows that the seller will win a deal in any cost, the seller will get it at any cost, meaning, the price will go down. Thus, in another way, the moment when the seller fears a price negotiation and on the other side there is an experienced buyer, the price will go down. This is often said that fear is the most expensive feeling in a company. Additionally, it is often to be seen that companies, salespersons , entrepreneurs or freelancers are anxious to lose a deal when customer just takes the price down.

Pricing confidence is an essential organizational characteristic which allows teams to sell the product confidently and believing in the price worthy value of a product Liozu et al.

Furthermore, this leads to price confidence that leads from the confidence a seller has in the product they are selling. However, when the seller is not confident about the price or product they are selling, help from others to access your product that has the value for the price is possible as well, and this leads to commodization.

Commodization happens when the product a seller offer is as good or as bad as the competitor is offering, where it proves that the seller has no right to sell the product in a higher price. However, customer to drive down the price of a product during a negotiation often uses commodization.

Thus, it is really important to convince buyers that the seller is not selling commodity when you understand the value and the price the product is worth for. From Wikipedia, the free encyclopedia.

Cost-plus versus value-based pricing". Archived from the original on Journal of Business-to-Business Marketing. Value delivery and value-based pricing in industrial markets.

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Customer-driven pricing is the practice of setting prices according to perceived value on the part of the customer for the goods or services. The assumption basis for this model is that a customer is willing to pay a certain price when the value delivered exceeds that cost.

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Customer value-based pricing is setting price based on buyers’ perceptions of value. Therefore, the marketer cannot design a product and marketing programme and afterwards set the price. Instead, price is an integral part of the marketing mix – it is determined before the marketing programme is set. The Process of Customer Value-based Pricing. In customer value-based pricing, the company first .

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In this module we will start with the importance of pricing, especially for the bottom line. Having this in mind, and after showing how pricing is the most important driver of profitability, when you finish this module you will be able to execute cost, competition and customer-based pricing. Value-based pricing in its literal sense implies basing pricing on the product benefits perceived by the customer instead of on the exact cost of developing the product. For example, a painting may be priced as much more than the price of canvas and paints: the price in fact depends a lot on who the painter is.

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Misconception 3: The brand’s value is part of the value-based pricing calculation. With value-based pricing, the marketer’s goal is to put a dollar amount on its differentiated features. The method’s focus is on features that add value to the customer and that can be converted into dollars and cents. Customer-based pricing: where prices are determined by what a firm believes customers will be prepared to payCompetitor-based pricing: where competitor prices are the main influence on the price setLet's take a brief look at each of these approaches;.