The next task is to figure out which product features are unique, that is, differentiated, from the competitor’s offering. For products that are truly new, without peers, the value-based pricing methodology won’t work well.ģ) Understand differentiated worth. Value-based pricers always ask the question: “What would this segment buy if my product wasn’t available?” This “ next best alternative” for the target is the essential point of comparison for calculating the value-based price. This pricing method only works when the target segment has a specific competitor’s product they can buy instead. If they have multiple segments, they must determine a suitable value-based price for each one.Ģ) Compare with next best alternative. Marketers can’t use value-based pricing unless they have a specific segment.
1FOCUS QUICK START TV
Brand A’s focus is only on big-screen TV buyers, not all TV buyers. (For B2B products, it can be a single customer). The first thing to know about value-based pricing is that it always references one specific segment. Now let’s apply value-based pricing by considering each part of the definition carefully:ġ) Focus on a single segment. Both TVs have other features that are similar - both have built-in WiFi, the same level of definition, same number of HDMI inputs, same refresh rate, and so on. The company’s closest competitor, Brand B, recently introduced a 60-inch TV for $799.
It wants to figure out the price for its new 65-inch LED TV, the biggest screen size in the marketplace at the time.
To understand how value-based pricing works, let’s take the example of Brand A that is about to launch a new LED television.
I like to use this definition: “Value-based pricing is the method of setting a price by which a company calculates and tries to earn the differentiated worth of its product for a particular customer segment when compared to its competitor.” What is more, these misconceptions often lead companies to shy away from using it, instead settling for cost-based or other pricing methods that leave money on the table. It creates more confusion among marketers, even many pricing experts, than any other pricing concept. In my 15-plus years of working with companies & teaching courses on pricing strategies to MBA students, I have found value-based pricing (also known as “value pricing”) to be the most commonly discussed concept that’s also the most misunderstood one.
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