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Value-Based Pricing: Definition, Strategies & Example

Value-Based Pricing: Definition, Strategies & Example
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Lesson Transcript
Instructor: Shawn Grimsley
Price isn't everything when making a purchasing decision and a smart business knows it. In this lesson, you'll learn about value-based pricing. You'll also have a chance to reinforce your knowledge with a short quiz.

Definition of Value-Based Pricing

Value-based pricing is based on the belief that the optimal price for a product or service is a reflection of the value a consumer perceives in that product or service. A consumer's perception of value is based upon his or her needs, preferences, expectations, financial ability, and what a competitor offers as an alternative.

Strategy

Value-based pricing requires market research, starting at the product development stage. Careful research of the market is necessary to determine how much the typical consumer values the product or service, as well as what particular attributes are valued the most. Research of products and services offered by competitors is also essential.

Value-based pricing also requires a fair degree of advertising to communicate the value of a product or service to the target market. This is especially true if a company is new to the market, or is introducing a new product. The focus of the advertising should be on the attributes of the product or service that provides the greatest perceived value to the target market.

Example

Imagine that you are the president of a telecommunications company that has just developed a new smart phone. Before introducing the phone to the market, you do some marketing research. You bring together a focus group that represents your target market. You also send the phones out for beta testing, where select consumers will be able to use them and provide feedback.

The focus group provides insights on attributes that consumers are most concerned with, and the prices they are willing to pay for those attributes. The beta testing tells you what features the testers valued most.

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