I like to buy avocado every time I get the chance to visit Mr’s Jones small successful vegetable store around my block.Every time we engage in small conversations about the neighbourhoods and small theories about the meaning of life. Yesterday I caught the joyful owner changing the prices for some products in the store writing carefully the numbers with his old, almost empty, marker pen:
He smiled at me, - No, I set them a little bit higher because everybody is saying to me: “You should ask for more on them, they are very good”.
I left Mr’s Jones, thinking...can theHypermarket nearby, do the same?
Since 1967, when Philip Kotler popularised the Marketing Mix idea based on the four pillars: Product, Price, Place andPromotion and how all those four controlled variables can influence the customer response, the pricing strategy was mostly based on strict economic calculations related to the market and competition.
The most common pricing strategy, the Cost based mechanism is focused on the company’s economic situation and even if it can guarantee a desired achievable margin, it not always maximises the profitability.
Even when the assortment pricing is done based on the overall Margin desired, considering all the mathematical aspects of product weight in the assortment based on historical sales and the competition pricing positioning, we are still missing that extra fine touch that can still increase the profit and that is: Value.
What is Value based pricing? We can refer to this definition: “Value-based pricing is the method of setting a price by which a company calculates and tries to earn the differentiated worth of its product for a particular customer segment when compared to its competitor.” (*1) but short saying, as Mr. Jones knows better: the value-based pricing focuses on the customers when determining price, considering how much the customer believes a product is worth.
We cannot ask Mr. Jones to set the perfect prices in a Hypermarket or in a Worldwide Retail Enterprise but for sure we can replicate the personal touch that he is bringing in his small store by using the Information Technology support.
Knowing the Customer, understanding his needs and behaviour can help position a price for a product more towards the value it brings to the end Buyer.
Value based pricing models and software utilise customer data, as well as breakdowns of the relative value of different features within the assortment. A powerful Business Intelligence system along with a flexible Pricing System can help to understand and determine the correct value of a product and set the price accordingly.
As a conclusion, cost-based pricing generally results in competitive prices and may attract consumers who are looking for in expensive products and services. Value-based pricing often earn high profits on items sold, but some consumers may not be willing to pay the high price and purchase from a competitor.
An extreme focus on value-based pricing might leave the customer feeling exploited with negative affect towards sales.
A well-balanced assortment pricing considering various strategies will maximise the result and for sure, adding the Value based pricing in the mix will differentiate your business from the competition.
*1 -Harvard Business Review: A quick guide to value based pricing https://hbr.org/2016/08/a-quick-guide-to-value-based-pricing