UTS24760 Chap.8 Value Based Pricing Step by Step
Value Based Pricing Step by Step
Under this method the figure is anchored to what the buyer reckons they are getting, not to what it took to build or to whatever the item used to sell for, and the subject notes it is especially common in business to business settings. The substituted question is explicit: instead of asking what the product costs to make or what competitors are charging, the method asks how much this is worth to the customer.
Three key principles hold it together. Customer perception of value means price follows the benefit the customer believes they will gain, which is why the gap between true economic value and perceived value matters commercially.
Differentiation matters, because an offer with a feature nobody else has, a brand people trust, or a pull that is partly emotional can be charged out above the field, and without a point of difference there is no value gap to price against.
Segmentation matters, because different segments perceive value differently, which allows tiered pricing or premium versions and is the reason a single value based price is usually the wrong answer.
The procedure has six steps, and the order is load bearing: identify target customers, determine the competitive offers and the focal competitor, conduct a head to head comparison of features, identify differentiators and deficiencies, assess their economic value, and calculate the value based price.
The subject demonstrates it on a holiday rental where a pool is valued at a 20% premium on a $750 weekly rate, worth $150, and where the final step negotiates that to 50%, or $75. Step six is a negotiation rather than an arithmetic step: it asks whether the competitor's price is realistic, whether you can make money at your answer, and whether it at least covers variable costs.
The chapter then runs the value in use method the first written case requires, building an economic value bridge from a competitor price through differentiators and deficiencies to a maximum, then sharing the value created, and it closes on how a quantified benefit becomes a tier structure.
What this chapter covers
- 01
The question value based pricing substitutes for the cost question
- 02
Customer perception, differentiation and segmentation
- 03
The six implementation steps and why order matters
- 04
Choosing the focal competitor
- 05
Differentiators and deficiencies in both directions
- 06
Converting differences into dollars
- 07
Value sharing: why step six is a negotiation
- 08
From one value number to a tier structure
An economic value bridge with a deficiency in it
- +1Start at the reference price, not at cost. The competitor's $4,800 is what the buyer would pay to solve this problem today, so it is the baseline.
- +1Add the differentiators and subtract the deficiency. 4,800 plus 1,900 plus 1,100 minus 600 = $7,200, which is the maximum economic value: a fully informed buyer should be indifferent between your machine at $7,200 and the competitor's at $4,800.
- +1Share the value created. The value created above the baseline is $2,400; an even split gives the buyer $1,200, so the price is 4,800 plus 1,200 = $6,000.
- +1Check the floor and state the failure condition. At $6,000 against variable cost of $3,100, unit contribution is $2,900 and the margin is 48.3%, so cost does not bind. The bridge rests on the buyer accepting the $1,900 and $1,100 figures; if the sales process cannot evidence them, perceived value collapses toward $4,800 and the price reads as a 25% premium for nothing.
Key terms
- Value based pricing
- Setting price primarily on the perceived value a product or service delivers to customers rather than on production cost or historical price. It requires a point of difference to price against and a buyer able to attach a number to the benefit, which is why it is most common in business to business markets.
- Focal competitor
- The specific competing offer a buyer would choose instead of yours, whose price becomes the baseline of the economic value calculation. Selecting the wrong one invalidates every figure built on top of it, which is why it is settled at step two rather than assumed.
- Differentiator and deficiency
- A feature on which your offer is better than the focal competitor's, and one on which it is worse. Both are converted into money and both enter the bridge, the first as an addition and the second as a subtraction.
- Value sharing
- The deliberate decision about what proportion of the value created above the competitor's price is retained by the seller and what proportion is left with the buyer. An even split is a common convention; pricing at the full maximum leaves the buyer indifferent and removes their reason to switch.
- Capture rate
- Price expressed as a share of the quantified benefit a product creates for a customer. Single digit capture rates are normal, because a quantified benefit is usually an average across a segment whose members differ, and because the buyer's net gain is the reason to buy at all.
Value Based Pricing Step by Step FAQ
Why is the order of the six steps so important?
Because steps five and six have no meaning without steps one and two. Step one decides whose value you are measuring, and the same product creates very different economic value for different segments. Step two decides what you are measuring against, and the entire bridge is built on the focal competitor's price.
A student who jumps straight to quantifying benefits ends up with a number that is an average over an undefined population measured against no baseline, which cannot be defended when the tutor asks where it came from.
Should I price at the maximum economic value?
No. The maximum is the point at which a fully informed buyer is indifferent between your offer and the alternative, and an indifferent buyer does not switch. Step six exists to decide how much of the created value to leave with the customer, and the subject frames this as a negotiation that takes place between buyer and seller in many business to business settings.
Its three checks are whether the competitor's price is realistic, whether you can make money at the resulting price, and whether it at least covers variable costs.
How does a single value estimate turn into a price list?
Through the segmentation principle. If a platform generates an average of $2,000 a month of extra revenue for its users, a price near that average would exceed the benefit for half of them, so the firm instead offers tiers reflecting the value delivered to different segments rather than the cost to serve each.
The subject's illustration prices a basic plan for startups, a growth plan for small businesses and a professional plan for larger teams, capturing between a fortieth and a tenth of the quantified benefit and letting buyers sort themselves.
Assessment move
Draw the bridge by hand every time, even when the numbers are easy. A vertical list of baseline, plus items, minus items and total makes the deficiency visible and forces you to name the baseline out loud, and both of those are where marks are lost. Then add two rows below the total: value created, and the split you chose with one sentence of justification.
Practise the conversion from feature to dollar, because that is the step that feels hardest and is worth the most. Take any product you use at work or in a part time job, list five features, and for each one write the unit of benefit and the rate: hours saved times a labour rate, units of waste times a unit cost, downtime avoided times an hourly cost.
If you cannot name a unit and a rate, the feature is not yet priced, and saying so explicitly is better than inventing a number.
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