(also value optimized 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 (fashion), in niche markets, in shortages (e.g. drinks at open air festival on a hot summer day) or for complementary products (e.g. printer
cartridges, headsets for cell
phones). Goods which are very intensely traded (e.g. oil and other commodities), or which are sold to highly sophisticated customers in large markets (e.g. automotive industry) are usually sold using cost-plus pricing.
Value-based pricing in its literal
sense implies basing pricing on the product benefits perceived by the customer instead of on the exact cost of developing the product. For example, a painting
may be priced as much more than the price of canvas and paints: the price in fact depends a lot
on who the painter is. Painting prices also reflect factors such as age, cultural significance, and, most importantly, how much benefit the buyer is deriving. Owning an original Dalí or Picasso painting elevates the self-esteem of the buyer and hence elevates the perceived benefits of ownership.