In case of marketing majority of time company prices its products either according to the cost of a product or according to demand and supply of the product but for some products companies use a different method called value based pricing. Value based pricing refers to that pricing in which the company sets the price of the product according to the perceived value by the consumer and not by the company. Hence, for example, the price of iPhone is always higher than the price of other brands of mobiles due to consumer perception about Apple iPhone being better than others, in simple words this method of pricing basically works due to consumers mindset of showing others that they own better products than them. In order to understand more about this concept, one should look at the advantages and disadvantages of value based pricing –
Advantages of Value Based Pricing
Higher Profit Margins
The first and foremost advantage of this pricing is that it leads to higher profit margins for the company because in this pricing customer does not bargain for the price of the product besides company gets monopoly type pricing power as customers purchase products according to value perceived by them on purchasing that product rather than analyzing as well as comparing the price of the product with its competitors.
Greater Brand Loyalty
Another benefit of value based pricing is that usually customers who purchases the product have great loyalty to such brands because they will not switch easily to other brands as majority of customers switch to other brands due to price difference between the two brands but in products which are sold on value based pricing the price factor comes last which ensures that customers remain with a particular brand for many years if the company does not disappoint the customer with respect to the quality of the product purchased by them.
Low Competition
In case of this type of pricing companies do not have to worry too much about the competition because risk of competition is high in case of those products which have close substitutes or are price sensitive but since here we are talking about consumers buying the product due to perceived value rather than looking at price or substitute products the question of competition does not arise.
Disadvantages of Value Based Pricing
Lower Customer Base
The biggest disadvantage of this pricing is that if the company is thinking that it can market its product to a large number of customers successfully than it will be disappointed because the majority of consumers are price conscious and only a few customers look to buy product purely due to value perceived by them. In simple words, the company will need to keep sufficient profit margin so as to compensate for lower sales due to the lower customer base.
Constant Pressure on Company
In case of value based pricing loyal consumers of the company have high expectations from the company whenever company launches a new range of products and if company does not live up to the expectations of its loyal consumer than the company runs the risk of losing its loyal customers as the customer base of the company due to the company following this pricing strategy is not wide enough which in turn can put a substantial dent on the sales as well as profits of the company.
Cost of Product is ignored
Another limitation of value based pricing is that this method ignores the cost involved in making the product as the focus of this method is to price the product according to the perception of value by the consumers. In simple words, this method ignores the basic principle of pricing that is to first consider the cost involved in making the product and then adding sufficient profit margin to that cost so as to arrive at a final sales price of the product.
As one can see from the above that value based pricing has advantages as well as disadvantages and that is the reason why any company thinking of adopting this pricing strategy for its products should carefully read above points and then take the decision whether to adopt value based pricing for its products or not.