Value Creation

The Source of Pricing Advantage

Strategic pricing harnesses the benefits of differentiated products and services, with a foundational understanding of how these create value for customers being crucial for effective pricing strategies. Many companies fail to fully leverage or understand the potential value their offerings can create, mistaking mere feature enhancements for value enhancements that should drive profitability. Deep insights into customer value are key for organizations to improve their pricing performance, enabling them to support price justifications and make more profitable business choices.

Value in pricing strategy is closely associated with exchange value, which considers the available alternatives customers could turn to for fulfilling similar needs. Economic value, therefore, depends on these alternatives and the differentiation value, which includes both monetary and psychological benefits making up the total economic value. This total economic value is the upper limit of what a customer would pay when fully informed about the available market alternatives.

Effective value estimation processes involve collecting data on competitors and estimates of customer value, using this information to strategically price products. Two primary components help in this estimation: competitive reference prices and customer value drivers, including both monetary and psychological factors. Monetary value typically relates to tangible cost savings or income enhancements, while psychological value involves the innate satisfaction customers derive from a product. Marketers also utilize various quantitative techniques like conjoint analysis to estimate willingness to pay, particularly for differentiating attributes that substantially contribute to the overall perceived value of a product.

Successfully leveraging these insights into customer value and competitive alternatives enables companies to position their pricing strategically, aligning product prices closely with actual and perceived customer value. This alignment helps in maximizing profits by ensuring that prices are set not just based on costs or market rates but on the value delivered to the customer. This strategic approach demands thorough data collection, effective communication of value to the customer, and an organizational commitment to maintaining focus on long-term profitability, rather than transient competitive metrics like market share.