Value pricing is a pricing strategy in which a company sets its prices based on the perceived value that its products or services offer to customers, rather than on the prices of competitors or the company’s own costs. This approach involves estimating how valuable a product or service is to a customer and then setting the price based on that estimate. Value pricing is based on the idea that customers are willing to pay more for products or services that they perceive as being valuable, and that the value of a product or service is not determined solely by its cost or the prices set by competitors. By focusing on the value that its products or services offer to customers, a company can set prices that are more in line with customer needs and preferences, and that can potentially maximize its revenue and profits.
A restaurant prices all appetizers below $10, including those that contain more expensive ingredients than several main dishes that cost $25. This is done because in the restaurant’s experience, customers value appetizers less than main dishes and are unwilling to pay more than $10.
Fast Moving Consumer Goods
A fast moving consumer goods firm prices hair treatment higher than hair conditioner despite the costs of the two being more or less the same.
Art is typically priced based on its perceived value.
A capital good such as an industrial robot may be priced based on its ability to generate revenue for customers. For example, if an industrial robot can improve customer profits by $1,000,000 a price of $500,000 would allow the customer to achieve a return on investment of 100%.
A book is of very high value to geologists but of little interest to anyone else. In this case, the author has incentive to charge an unusually high price because the few people who want it place a high value on it.
A highly specialized IT consultant finds that clients often have big problems when they need her services. As such, they are generally willing to pay high prices.
People value their lives and are often willing to pay a high price for medical treatments far beyond their cost. This can raise situations whereby a high price is charged for a treatment that has a low cost. In many cases, a public healthcare system prevents this type of pricing.
Luxury items such as a fashion brand with high social status may price items based on customer perceptions of value. For example, a particular brand may find that they can charge $500 for shoes but can’t charge more than $100 for an umbrella. In theory, the umbrella could be more expensive to manufacture.
Veblen goods are products and services such as a wedding where people feel they should spend a high price and may actively avoid lower cost options. For example, a wedding venue may charge a similar price for seafood, meat and vegetarian selections despite large differences in cost.