As part of the exchange process, a firm provides a product or service, or some combination thereof, and in return, it gets money. Value-based marketing requires that firms charge a price that customers perceive as giving them a good value for the product they receive. Firms practice three types of pricing strategies.
The first pricing strategy, cost-based pricing is when a firm determines the cost of producing or providing its product and then adds a fixed amount above that total to arrive at the selling price. For example, a bookstore might purchase a book at the purchaser’s wholesale price and then mark it up a standard 35 percent.
The second type, the competitor-based pricing strategy, is when a firm prices below, at, or above its competitors’ offering. For example, the same book store might decide to take the top 10 books on the New York Times bestseller list and price them $2 dollars less than its primary competitor’s price.
Although relatively simple to implement, neither of these methods alone ensures that customers will perceive they are getting a good value for the products or services. That perception requires a third approach, termed value-based pricing, in which the firm first determines the perceived value of the product from the customer’s point of view and then prices it accordingly. For example, the bookstore might determine from its prior experience that students have various attitudes toward textbooks and their prices: Some students want a new book, whereas others accept a used one for a lesser price. Giving them a choice of both options provides value to both groups.
However, value-based pricing remains one of the least understood areas of business decision making, even though it is one of the few business activities with a direct impact on profits. Clearly, it is important for a firm to have a clear focus in terms of what products to sell, where to buy them, and what methods to use in selling them. But pricing is the only activity that actually brings in money by influencing revenues. If a price is set too high, it will not generate much volume. If a price is set too low, it may result in lower-than-necessary margins and profits. Therefore, prices should be based on the value that the customer perceives (Grewal & Levy, 2010).
Grewal, D & Levy, M. (2010). Marketing. (2 ed.). New York, NY: McGraw Hill Irwin.