Value-based pricing is not how most brands and manufacturers price their products. It is, however, an attractive pricing approach that can yield maximum profit despite its apparent complexity. The method is often associated with premium brands such as Hermes, Patek Phillippe or Chanel.
Some studies have pointed out that these premium brands are holding back on e-commerce and still try to drive traffic to physical showrooms. They feel that the constraints of e-commerce prevent them from delivering certain values such as exclusivity. But as brick-and-mortar is clearly losing momentum, businesses must reconsider their 4Ps to stay afloat.
How can these premium brands, and other brands, keep pricing for value if they can't convey those values online? Is value-based pricing compatible with e-commerce?
What is value-based pricing?
Pricing goods based on (consumer) value means setting the price based on the buyers’ perceptions of value rather than on the seller's cost (Kotler and Armstrong, 2012). Businesses often adopt this strategy for niche segments where customers focus more on product value and are not too price-sensitive.
There are two types of value-based pricing:
- Good-value pricing, which is offering the right combination of quality and service at a reasonable price and
- Value-added pricing which is attaching value-added features and functions to differentiate an offer, thus supporting higher rates.
While cost-based pricing methods are based on the cost of production, value-based pricing depends on the value perceived by the customer. Brands with high-end positioning that offer uniquely valuable features are more likely to succeed with this strategy, rather than brands that sell commoditized products.
Value-based pricing is far more difficult to introduce than cost-based pricing. It requires a deep understanding of the target market, the competition, the respective valuation of various features by different segments of consumers... Also, many brands will run into a straightforward problem: customers don't really value their products.
What are the pros and cons?
This method results in the highest possible price that can be charged and maximizes profits. It can lead to a virtuous circle of high prices supporting high perceived value supporting high prices etc.
Since product value depends on customers perception, the value-based pricing method is only applicable for some market segments, not the vast majority of products.
Additionally, it is challenging for businesses to understand what their customers' expectations are and deliver the right values. It calls for a significant budget to perform market research and marketing activities to learn and promote product values.
Finally, value-based pricing encourages high market competition. New competitors can introduce me-too products at a lower price and dent the brand's market shares.
Value-based pricing applied in the consumer electronics market
Apple has employed value-based pricing in their products with tremendous success. The iPhone X is an illustration.
Pricing for value, not based on costs
According to a report by IHS Markit, the cost of parts of the iPhone X (64Gb) is $370.25, excluding manufacturing and software cost. The US retail price is $999. Apple has a tightly-controlled distribution, a significant share of direct sales and razor-thin margins for its few retailers. Apple priced the iPhone X based on what they thought people would pay for it, not what it costs to make it.
The iPhone X has the highest price in the market, compared to other smartphones that offer similar features. In particular, the Samsung S9 plus (64Gb) costs $840; the OnePlus 6 (64Gb) costs $529. Despite the high price, Apple is still doing great. In 2018, Apple sold 52.2 million iPhones in three months.
Value perception is earned, not conjured
Apple has pioneered high price points since the start. The original iPhone was $499, which was unheard of for a phone. Apple could afford to set this price point because of its excellent reputation as a hardware and software company.
Since then, they kept the virtuous circle going. High perceived value, supported by high prices, justify incremental price increases. It shows that the value-based pricing strategy can absolutely benefit premium, high-end brands and is compatible with their e-commerce expansion: Apple has long integrated its retail channels with each other, seeing them as mutually supportive rather than opposed.
The cons: me-too products
We mentioned earlier that pricing for value encourages the competition to tap into your value proposition. It means that other companies will come up with products that are "just as good" but are a fraction of the cost.
Big brands like Samsung or Huawei have done so implicitly. Others have done so explicitly: OnePlus, for instance, has marketed their phones as flagship killers, advertising on-par features and hyper-competitive price-tag. Read our article on the topic: From Cost-Based to Value-Based: the Pricing Journey of OnePlus.
List of references :
- Principles of marketing - Kotler, P. and Armstrong, G. (2012). Principles of marketing. Boston: Pearson Prentice Hall.
- iPhone X Costs Apple $370 in Materials, IHS Markit Teardown Reveals - ihs.com/
- Galaxy S9 is $720, but you'll pay more on Verizon and AT&T - cnet.com/
- iPhone X vs. OnePlus 6: Which phone has the best camera? - cnet.com/
- What iPhone slowdown? Apple's sales are better than feared - cnet.com
- Where the iPhone X is cheapest and most expensive—in dollars, pounds, and yuan - qz.com/
- 10 Retailers That Have Closed Stores in 2018 - footwearnews.com/
- Marketing Mix - wikipedia.org