The value-based pricing model is widely used in businesses ranging from luxury goods to pharmaceuticals and medical devices. Determining price in this way is a widely used technique for bringing a new product to market, increasing profits and maintaining a company’s image. Therefore, the study of the market and taxpayers’ needs is often the object of many analytical studies and is included in the list of the most popular services of consulting agencies such as https://digitalho.com/
What is a Value-Based Pricing Model
This is one strategy for determining the price at which a company’s products will be sold to the end consumer. Unlike cost-based pricing, it is not based on the cost to manufacture the product, but on its value to the future customer. Value to the customer means the amount of money the consumer is willing to give for a product with certain characteristics (utility).
To successfully implement this strategy, the company needs:
- competent analysis of the market’s impact on the value of a new product;
- measurement of the value of the brand products according to the opinion of the company’s existing clients;
- studying the company’s major competitors and determining their role in a value-based pricing strategy;
- evaluating the impact of international reference pricing.
The more unique and objectively valuable a company’s new product is, the easier it is to price it based on perceived value.
In health economic analysis, calculation of value based price relies on a cost-effectiveness threshold value that a payer is willing to accept. It reflects the opportunity costs of generating one year of life in perfect health in a society.
Strengths and weaknesses of this model
The main advantages of value-based pricing include:
- The ability for the product to establish a niche in the market faster.
- Gives the opportunity to set a higher markup and increase the company’s profits.
- Studying competitors and the manufacturer’s desire to increase the value of their product in the eyes of consumers helps in working on its quality.
Disadvantages of the model:
- The analysis required to set the value of a product correctly is quite a difficult process. Analytical work requires certain knowledge, time and resources.
- The value to customers cannot always be measured in any precise units.
- The perceived value can vary greatly depending on the region, the state of the economy, and other factors.
How to set a value-based price
As mentioned before, this pricing model is quite complex. To establish the value of a product, you not only have to calculate the cost of making it. You also have to do some extra work:
- Analyzing customers who already use the company’s products and determining the price they are willing to pay for a new product from your production.
- Analyze the entire market available to sell your products. Existing customers already love your brand. Perhaps a new product with the right price will help you carve out a new niche and expand your customer base.
- Competitor Analysis. Even if your new product doesn’t have exact equivalents, you can research similar products from competitors. In this case, the markup on the product will be based on how much taxpayers are willing to pay for the difference in quality.
Digital tools to demonstrate the value of your product
Today, many consulting companies are developing value tools for market access. This process involves a team of specialists that include health economists, epidemiologists, software developers and specialists who know the business requirements of the company that is preparing to present its product to the world. Value demonstration tools communicate main advantages of a product and how it differs from competitors in an easy-to-understand, visual and engaging way. They can be used for promotional purposes as well as in negotiations with government officials.
