What Is Customer-Driven Pricing? (2024)

Table of contents

What Is Customer-Driven Pricing?

Setting prices is one of the most important business decisions. The majority of businesses use three key pricing methods. Respectively, one can speak about cost based pricing, competition based pricing, and customer based or value based pricing. Customer based pricing is the practice of setting prices following the customers’ perceived value of a presented product or service. The strategy is also known as value based pricing.

The assumption behind customer-based or value-based pricing is that consumers are willing to pay a special price when the value offered exceeds the given cost. Value based pricing can work when a product or a service is highly personalized and customizable. Such a condition exists because there are many options available. Besides, value based pricing is a great strategy when a company employs it in a market full of competitors offering similar products.

Another factor linked to customer based pricing, competition based pricing, and cost based pricing correlates to application in different geographical markets. The element is connected to the conditions when supply and demand forces have prejudice toward both a seller, which means buyers may be willing to pay more for a product compared to consumers elsewhere. Customer driven pricing should be differentiated from competition-based pricing because it does not entail setting prices based on what competitors present.

How Customer Driven Pricing Works

Customer driven or value based pricing stands on a particular foundation. In such a case, to optimize pricing, businesses need to determine how best to segment the given market. It should be done to establish the environment in which the prices reflect the differences in value differentiating between various types of customers.

At this point, customer driven pricing works in a manner that businesses set prices at premiums to increase aggregate sales. When it comes to determining the right triggers for value based pricing, there is a particular approach to consider. If a product offered by businesses is available to consumers from several competitors while also lacking differentiation, these factors make customer driven pricing unlikely to succeed. At this point, customer driven pricing properly works when competition is thinner.

Measuring customer value - The Difficulty in Customer Value Based Pricing

Measuring customer value while attaching it to a product is a challenging task. Respectively, calculating all the elements showing the costs of ingredients is an easy task to achieve. However, assigning value to a product to reach customer satisfaction is abstract and challenging. Aspects like taste, relaxation, conversation, and environment are hard to quantify. In value based pricing, the factor of value is highly subjective. The key challenge is that determining what constitutes value for different consumers is an extremely difficult task. What one person might perceive as valuable, others might perceive as not.

However, regardless of the challenges associated with measuring customer value, consumers still rely on this factor to determine the product’s price and its perception. In value based pricing, there is still a reliance on the aspect of value while determining purchasing behaviors and price-setting markups. When it comes to strategies for measuring customer value, companies often use consumer questionnaires. The primary approach is directed at determining what customers are willing to pay for a basic product and every added benefit. Based on the feedback, companies apply value based pricing while establishing the price for a product based on its established value.

Two types of Customer Value Based Pricing: Good-Value Pricing and Value-Added Pricing

When it comes to value based pricing, there are two major types of the approach:

• Good-value pricingPGood-value pricing is a distinct value based pricing that refers to offering the right combination of services and quality for an accurate and fair price. When it comes to the perception of what is reasonable, there is a particular relation between delivered customer value and price. Good-value pricing is often used for less expensive products. For instance, $1 prices for McDonald’s items represent good-value pricing. Essentially, the strategy can be linked to a fair price established by a lesser value attached to a lower price.
• Value-added pricing.Value-added pricing is considered to be an alternative value based pricing. It means associating value-added elements and services in trying to differentiate the product while also charging higher prices. Essentially, value-added pricing is associated with adding features, thus boosting customer value and creating the conditions for price raises. While competitor based pricing focuses on setting prices to match or beat competitors, value-added pricing as a part of value based pricing does not aim at cutting prices to match competitors. In contrast, the strategy entails attaching features to make it differentiate itself in the market and thus create a competitive advantage.

Good-value pricing and value-added pricing are two sides of the same coin, namely value-based pricing, showing how the approach can be used in different situations and achieve various objectives. In terms of companies using the strategy, airlines are most often appealing to the approach. Importantly, both methods can be used to provide lower quality services for reasonably lower prices or offer premium class services for higher prices.

Conclusion

Customer based pricing or value based pricing is the pricing strategy based on establishing prices for products and services based on the perceived value. While measuring such value can be problematic, companies often get customer feedback to develop a value- based foundation for setting a price. Value based pricing can exist in the form of good-value pricing and value-added pricing. As a result, the strategy is applicable in the context of present products with lower and high prices. It all depends on the customers and the value created for them.

Tags:

• Customer Driven Pricing

• Personalized Pricing

• Value-added pricing

• Good-value pricing