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value-based pricing

Contributor(s): Matthew Haughn

Value-based pricing is a method of arriving at an amount to charge for goods or services through assessing their perceived value to the purchaser. The value-based model contrasts with cost-based pricing strategies, such as cost-plus.

Generally businesses use value-based pricing as a means to a higher profit margin. In the consumer market, customers are often willing to pay more than a cost based pricing model, especially with emotional purchases. Customers may assess one company's product to be of greater value than a competitor's for many reasons including brand image, design, packaging, marketing, warranties, previous experiences and word of mouth. Apple, for example, has traditionally been able to achieve a higher profit margin because of the perceived cachet of its products and brand.

Companies that set good value-based pricing take into account how customers see their product in the context of competitor's offerings. Once an objective assessment and comparison of the strengths and weaknesses of the products are made, a realistic value to the customer can be estimated for each difference and the estimated values can be used to determine a reasonable value-based price for the product.

See also: wholesale price, list price, net price, fixed price, manufacturer's suggested retail price (MSRP)

This was last updated in May 2016

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