Question

The Nagle, et.al. textbook states: “Ultimately, the success of pricing strategy depends upon customers being willing [and able] to pay the price you charge.” How would you, as the supplier, implement a value-based pricing policy in a business-to-business (B to B) marketplace if you were using (a) a differentiated value or (b) psychological value relative to a product or service? Does it make a difference if you are using tactical pricing or strategic pricing? Describe the rationale for your answer.

Answer 1

To implement a value based pricing policy, it is necessary to price a product or service to appeal to a certain segment that is willing to pay based on the benefit offered by the company. The price set has to be a price that the consumer is willing or able to pay based on value in the segment. In a monopolistically competitive environment I would, determine what the value of my product based on what my few competitors are offering value-based pricing is defined based on the value that a product or service can deliver to a predefined segment of customers which are the main factor for setting prices as value-based pricing depends on the strength of benefits that a company can prove and offer to their customers.

Thus, value is the most important driving force in every business decision as value focuses on the price the potential customers are willing to pay based on the benefit offered by the business. For example, the cost for fixing a pipe at a customer's home for a plumber is $17.50 with the cost of travel, material cost and an hour's labour. However, the plumber may decide to charge a total of $50 to benefit from this business. Thus, the customer might not be happy about the overcharged price given by the plumber, at the same time there are possibility that the plumber will lose their customer, so it is important to measure the value of a product before setting the price too high. On the other hand, if the company has a clear-defined benefit that gives you an advantage over the competitor, the company is able to charge according to the value that is offered to the customers. Thus, this is a very profitable approach as it can break off potential customers who are driven only by price and also attract new customers from competitors.

Value-based pricing is a strategy which sets the price according to the perceived value of the product or service to the customer. This is in contrast to cost-based pricing, which prices products according to a traditional price, or based on the cost of the product.

You're not setting your price because your competitor has set a similar price. You show with your price that you're not only better than your competitors, but that you also bring that extra something to the table that they may not have known that they wanted or needed.

For example, of Coach. Why is a Coach bag so much more expensive than a regular purse? It is value-based, since its perceived value -- status, distinction, and pride-of-ownership -- is worth more to the customer than the simple cost of manufacturing.

Another great example of this is Apple. This company doesn't set its prices based on cost of materials or how much their competitors' charge. Their price is based on the value of efficiency, ease of use, and quality of life. Because customers see that value, they're happy to pay that larger price tag.

Of course, the B2C field's value based pricing will naturally vary slightly from its B2B counterpart. The basic formula, however, still holds true: Buyers want to know how your solution will impact their bottom line.

A Few Things to Keep In Mind:

• Value-based pricing is based on the perceived value to the customer rather than the cost of a product or an hourly rate.
• Make sure that your sales and marketing departments are aligned -- partly by ensuring that each member has a clear understanding of the pricing process.
• Make sure that there are no surprises in the final cost -- payment and services are clearly defined before the customer agrees to pay.
• It's important that your value be sustainable, through customer loyalty, customization, and unique features

Value is always in the eye of the beholder. For any buy/sell interaction to take place, both parties must profit from the exchange and ultimately receive more value (from their subjective perspective) than what they are giving up.

It’s your job as a B2B marketer to clarify, manage, and communicate that value proposition, which gives your organization the je-ne-sais-quoi needed to justify your pricing. Transform these 5 barriers into opportunities and you’ll be well on your way!