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Value-Based Pricing

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Submitted By boganmeister
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Value-Based Pricing

PROC 5830 - Pricing
Webster University

Introduction If you own and operate a store and customers are not coming in, what is the first thing you do? You hold a sale. Once you slash your prices by 25 percent or give shoppers who buy one item the chance to buy another item for 50 percent off, your merchandise will start flying off the shelves. While slapping a price tag on your product or service seems like a one-minute job, it is actually a lot harder than it looks. Set your prices too high, and you lose sales. Set them too low, and you lose money.

Value-Based Pricing
Value-based pricing is a method of pricing products in which companies first try to determine how much the products are worth to their customers. The goal is to avoid setting prices that are either too high for customers or lower than they would be willing to pay if they knew what kind of benefits they could get by using a product. Products are priced based on the value it creates for the customer. This is usually the most profitable form of pricing. Inappropriate pricing strategy can shrink profitability, warp customer relationships, and destroy even a well-known brand. Therefore, companies have to focus on value creation over the long-term by honoring the needs of customers. For customers, the benefit of a product or service versus the price of the product or service is what matters most in the purchasing decision.
Taking this fact into consideration companies have to set their price in order to capitalize on the perceived value of customers. Besides setting the price level, companies have the opportunity to build innovative pricing models that better meet the needs of the firm and its customers.

Cost based pricing
Cost based pricing occurs when a business figures out the cost of goods, sets a desired margin for each unit, adds that margin

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