Value-based pricing

Value-based pricing is a pricing strategy which sets prices primarily, but not exclusively, according to the
perceived or estimated value of a product or service to the customer rather than according to the cost of the
product or historical prices. Where it is successfully used, it will improve profitability through generating
higher prices without impacting greatly on sales volumes.
The approach is most successful when products are sold based on emotions (e.g. drinks at open air festival on
a hot summer day). Goods which are very intensely traded (e.g. oil and other commodities) are often sold
using cost-plus pricing. Goods which are sold to highly sophisticated customers in large markets
(e.g. automotive industry) have also in the past been sold using cost-plus pricing, but thanks to modern
pricing software and pricing systems and the ability to capture and analyze market data, more and more
markets are migrating towards market- or value-based pricing.
 Competition-based pricing
Various factors can be taken into consideration while pricing a product. Competition-based pricing is the
pricing mechanism wherein prices are set in accordance to the prices of the competing products.
The prices may be set in line with those of the competitors so that the company does not face any
competitive disadvantage due to its price.
This can be advantageous because people often find out the going rate/normal rate of similar products before
the purchase. However, it can add to disadvantage if a higher quality product is priced at a lower price just
be in line with the prices of the competitors. Using a competition-based pricing strategy, the company
prices its products based on the competitor's product pricing.
This strategy is usually implemented by companies when there are several competitors in the market selling
similar products. The pricing strategy used by Coke and Pepsi is an example of competition-based pricing.
Neither Coke nor Pepsi would price their soft drinks different from each other because it may mean lost
market share. Because Coke and Pepsi are direct competitors and have similar products, they need to be
sensitive to each other's pricing.
 Bundle pricing
In a bundle pricing, companies sell a package or set of goods or services for a lower price than they would
charge if the customer bought all of them separately. Common examples include option packages on new
cars, value meals at restaurants and cable TV channel plans. Pursuing a bundle pricing strategy allows you
to increase your profit by giving customers a discount. Bundle pricing is built on the idea of consumer
surplus.
Every customer has a price that he is willing to pay for a particular good or service. If the price you set is
equal to or lower than what the customer is willing to pay, the customer will buy, as he considers the price a
bargain. The difference between what the customer pays and what the customer was willing to pay is
known in economics as the consumer surplus. Bundle pricing is an attempt to capture more of your
customers' consumer surplus.
 Geographic pricing
When pricing, a seller must always consider the costs of shipping goods to the buyer. These costs grow in
importance, as the freight becomes a larger part of total variable costs - quantity, weight and distance from
seller will generally increase shipping costs considerably. Pricing policies can be established whereby the
buyer pays all the freight expense, the seller bears the entire cost, or the seller and the buyer share this
expense. As the name suggests, geographical pricing is a pricing model where the final price of
the product is decided on the basis of the geography or the location where the product is being sold. When
an organization is operating in multiple countries or multiple regions within a country, then they have to
implement geographical pricing as per the local taxation laws and local requirements.