what is value based pricing 
value based pricing is a strategy of setting prices primarily based on a consumer s perceived value of a product or service value based pricing is customer focused meaning companies base their pricing on how much the customer believes a product is worth value based pricing is different from cost plus pricing which factors the costs of production into the pricing calculation companies that offer unique or highly valuable features or services are better positioned to take advantage of the value based pricing model than companies that chiefly sell commoditized items understanding value based pricingthe value based pricing principle mainly applies to markets in which possessing an item enhances a customer s self image or facilitates unparalleled life experiences to that end this perceived value reflects the worth of an item that consumers are willing to assign to it and consequently directly affects the price that the consumer ultimately pays although pricing value is an inexact science the price can be determined with marketing techniques for example luxury automakers solicit customer feedback that serves to quantify customers perceived value of their experiences driving a particular car model as a result sellers can use the value based pricing approach to establish a vehicle s price going forward characteristics needed for value based pricingany company engaged in value based pricing must have a product or service that differentiates itself from the competition the product must be customer focused meaning that any improvements and added features should be based on the customer s wants and needs of course the product or service must be of high quality if the company s executives are looking to have a value added pricing strategy the company must also have open communication channels and strong relationships with its customers in doing so companies can obtain feedback from customers regarding the features they re looking for in a product and how much they re willing to pay for companies to develop a successful value based pricing strategy they must invest a significant amount of time with their customers to determine their wants scenarios in which value based pricing is usedthere are countless scenarios in which value based pricing may be an appropriate strategy a few potential value based pricing scenarios include types of value based pricingthere are two types of value based pricing good value pricing and value added pricing a brief description of each is below good value pricing refers to the practice of pricing a product based on its quality or the service that it provides to a customer value added pricing refers to the practice of pricing a product based on the perceived value that products and their features add for a customer sellers attempt to determine what customers believe the value of a particular feature of the product is worth and price the product accordingly 2common misconceptions about value based pricingvalue based pricing is very widespread but there remain some misconceptions about this practice such as difference between value based pricing and cost based pricingan alternative pricing method to value based pricing is cost based pricing also known as cost plus pricing value based pricing is dependent on the value that customers are willing to assign to or pay for particular products features and services on the other hand cost based pricing assigns a selling price to an item by factoring in the costs associated with producing that item once those costs are tallied a markup is added to the final price to generate a profit advantages and disadvantages of value based pricingvalue based pricing offers a number of pros and cons for sellers some of the potential advantages include some of the possible disadvantages of value based pricing include allows companies to charge a higher price pointpromotes customer loyaltymay increase brand valueincorporates customer feedback in future productsrequires a significant investment to collect customer datamay price out some customerscustomer perceptions of value are likely to change