Value-based pricing

Value-based price (also value optimized pricing) 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.

The approach is most successful when products are sold based on emotions (fashion), in niche markets, in shortages (e.g. drinks at open air festival on a hot summer day) or for complementary products (e.g. printer cartridges, headsets for cell phones). Goods which are very intensely traded (e.g. oil and other commodities), or which are sold to highly sophisticated customers in large markets (e.g. automotive industry) are usually sold using cost-plus 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. Painting prices also reflect factors such as age, cultural significance, and, most importantly, how much benefit the buyer is deriving. Owning an original Dalí or Picasso painting elevates the self-esteem of the buyer and hence elevates the perceived benefits of ownership.

Price should be controlled within the value of the benefits that one business provides for its customer, while at the same time considering the price that their competitors' charge. Thus, prices are to be set according to the value that the business provides for its customer. To maximize the profitability of the products sold by the business, the business has to measure the benefit of the product that they provide to their customers, survey the criteria for the customers' buying decision (speed of delivery, convenience or reliability, etc.) and also identify the value of the benefits provided to the customer.

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