Perceived Value Pricing

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Contributed by: Devendra Vyavaharkar

 

What is Perceived Value Pricing? Meaning.

Perceived Value Pricing or Value-Based Pricing or Value Optimized Pricing is a market-based method of setting the price of a product (or service), primarily on the value perceived by the potential customer(s), rather than basing it on the cost of the product or on past prices of the same/similar product.

Usage of Perceived Value Pricing. Applications

What circumstances are conducive to Perceived Value Pricing (PVP)?

  • NICHE MARKETS that target specific customer needs (e.g. office desk toys/decorations)
  • When a product holds an EMOTIONAL VALUE for the customer (e.g. commemorative watches)
  • CAPTIVE PRODUCTS: Items designed specifically to be used with another core product (e.g. printer cartridges)
  • In case of SHORTAGES (e.g. food and beverages sold in an open-air music concert)
Pricing demand graph

In general, the use of PVP often depends upon how strongly the company can demonstrate the benefits of the product to its potential customers.


Steps in assessing the Product's Value to the Customers

Obviously marketing research is a very important component of this type of pricing. Note that the primary objective of pricing in marketing is to create a strategy that profitably extracts the maximum from a consumer's surplus (the gap between the price that consumers are willing to paybased on their preferencesand the market equilibrium price) and dead weight loss (the loss of economic efficiency in terms of utility for consumers/producers such that the optimal or allocative efficiency is not achieved).

  • Identify the Alternative Product for your customer (If not your product, then what would the customer choose?)
  • Determine the price of this Alternative Product - 'A'
  • List down the additional benefits your product has over the Alternative Product. Estimate the additional price your customer would pay for these additional benefits - 'B'
  • List down the additional benefits the Alternative Product has over your product. Honestly estimate the worth of these additional benefits to your customer - 'C'
  • Calculate the best price using the formula: True Economic Value (TEV) = A + B - C

Note that the True Economic Value calculated could differ from the actual value perceived by the customer. It is the marketer's job to bridge the gap between these 2 values through customer education (to push the perceived value towards the TEV). True Economic Value is the upper limit to what the customer might pay for the product.


How should we choose the customer to base the PVP on?
  • A customer who has purchased from you earlier.
  • A customer who hasn't purchased from you earlier.
  • A customer who has purchased from you, but didn't value your product differently vis-a-vis a competitor's product.

Based on the prices obtained from determining the Best Price for each of the above sets of customers, we can come across a price band. Finally, a price is set within this price band for our target market (i.e., for customers who value our product offering).


Sources:
Dolan, Robert J. (1999), "Pricing: A Value Based Approach", HBS Note 9-500-071, Boston, MA: Harvard Business School Publishing
Kotler, P. & Keller, K. L. (2016), "Marketing Management", 2016, pp. 516-518
ET Online (2016), "Perceived Value Pricing", The Economic Times
Sheehan, A. (2019) "Finding Your Niche: 8 Niche Market Examples to Inspire You", Shopify Blog.


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Overview of Pricing and Pricing Strategies

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Compare with: Psychological Pricing  |  Promotional Pricing  |  Competitive Pricing  |  Discount Pricing  |  Cost-plus Pricing  |  Standard Cost Pricing  |  Marginal Cost Pricing  |  Target Pricing  |  Penetration Pricing  |  Price Skimming

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