Value-based Pricing

Value-based pricing sets selling prices on the perceived value to the customer, rather than on the actual cost of the product, the market price, competitor’s prices, or the historical price. It’s a great pricing strategy in an oligopoly or monopoly, but not in commoditized markets.

My MBA professor called this baguette pricing to cut the loaf at the production cost for a floor price and the perceived value as the ceiling price. So long as one doesn’t try and take more bread that is reasonable, a deal is likely to occur.

But what happens if you want to do a second deal? One could argue that value-based pricing is still the right way to go, and one could also argue that as long as you don’t surpass the perceived value to the customer, you’ll be okay. The problem with this thinking is that it assumes that the client in unaware of your costs—something that occurs only rarely—and that you can continue to take a bigger piece of the loaf. This approach breeds neither trust nor loyalty, which means that your customer is going to keep shopping around for a better deal.

An alternative approach is to push the selling price down the loaf a little so you’re splitting the difference a bit more. This way, the client knows that they’re getting a great deal, they quickly understand that you’re sacrificing margins, and they’ll trust you enough to do a second deal. In fact, they’ll become a loyal partner, because they know that you’re looking out for them.

Extracting the maximum margins is a great thought, but these decisions should always be considered in conjunction to the message that you send your client. Good values mean happy customers, and happy customers make good clients.