Customer Value-based Pricing – Pricing based on Customer Value

Posted on Posted in Marketing Explained

After having presented the three major pricing strategies, let’s take a look at the first and most used one: Customer value-based pricing. Customer value-based pricing is considered to be the best pricing strategy, at least from a marketer’s point of view. Why?

Customer Value – Key in Customer Value-based Pricing

In the end, the customer decides whether a product’s price is right. Therefore, from a marketing perspective, pricing decisions, like all other marketing mix decisions, must start with customer value. When a customer buys a product, he exchanges something of value (the price) to get something of value in return (the benefits of having or using the product or service). Therefore, effective pricing should focus on the value the product provides for the customer: Customer value-based pricing. Effective, customer value-based pricing involves understanding how much value consumers place on the benefits they receive from the product. Then, we have to set a price that captures this value.

Definition of Customer Value-based Pricing

So what’s the definition of customer value-based pricing? Customer value-based pricing uses buyers’ perceptions of value (not the seller’s cost!) as the key to pricing. 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 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.

Customer Value-based Pricing Process
Customer Value-based Pricing Process

Measuring customer value – The Difficulty in Customer Value-based Pricing

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: they vary both for different situations and for different customers. Nonetheless, consumers will rely on these perceived values to evaluate the product’s price. 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.

Two types of Customer Value-based Pricing: Good-value Pricing and Value-added Pricing

We will now have a look at two distinct forms of customer value-based pricing.

2 Types of Customer Value-based Pricing
2 Types of Customer Value-based Pricing

Good-value Pricing – Customer Value-based Pricing

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. To give an example, take a look at McDonald’s 1€ menu items. Likewise, every car company offers small, inexpensive models better suited to the strapped consumer’s budget. 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. Passengers flying the low-cost airlines won’t get much value, but pay a price matching that value.

Good-value Pricing - Customer value-based pricing
Good-value Pricing – Customer value-based pricing

Value-added Pricing – Customer Value-based Pricing

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. Therefore, value-added pricing does not aim at cutting prices to match competitors, but attaching value-added features to differentiate the products from competitors’ offers. The added value justifies a higher price in customers’ eyes.

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. These additional value-added features increase the service’s value in customers’ eyes – and justify a higher price.

Value-added Pricing - Customer value-based pricing
Value-added Pricing – Customer value-based pricing