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Value-based pricing

What is 'Customer-Driven Pricing'

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BREAKING DOWN 'Customer-Driven Pricing'
Setting Prices Based on Customer Value

It is a typical conflict of objectives in companies is market share versus profitability, because in a business tradition, the higher your market share, the more profitable the company is. 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.

Both cost-based and value-based pricing strategies rely on marketing messages, but they do so in very different ways. Cost-based pricing considers your price relative to that of your competitors. You may choose to offer a lower price, than using other options to attract cost-conscious customers, or you may opt to charge an amount in the same ballpark so your offerings won't seem overpriced.

Either way, you're looking at your prices in comparison to those of your competitors, and making a choice based on what you believe your customers will accept. Value-based pricing uses retail cost as a way to send a message about quality.

Products such as Rolls Royce automobiles and Rolex watches are status symbols, and are regarded by their customers as being worth the additional cost. Cost-based pricing sets a price between a floor amount, which is the least you can charge and still earn a living, and a ceiling amount, which is the most the market will bear. The floor price offers the advantage of providing a competitive edge, with customers looking to pay as little as possible.

But you'll need to sell more products with a lower profit margin than you would at a higher price to earn the same net profit. Value-based pricing enables you to earn an even higher net profit, but you need to earn the respect and trust of your customers to get them to pay more. 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. To return to our airlines example, take a look at higher-priced premium airlines such as Singapore Airlines, Emirates, Etihad Airways or Lufthansa. Flying with these airlines will cost you much more — but customers are willing to spend that additional price because they will get more value. Value is added in terms of comfort, luxury, premium service and so further.

Overview of Pricing Strategies — Finding the right Psychological Pricing Strategies — Importance of Price for Products as a Bundle of Benefits — Products Role of Reference Prices in Pricing Decisions — Value-based Market Segmentation — Dividing the Market into Economic Value Estimation — How to estimate Economic Role of Economic Value in Pricing — Value-based Marketing Must-Reads — Best books about Marketing.

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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;.