The consumer’s perceived value of a product or service is the starting point of the value-based pricing strategy, that is the definition of prices based on the consumers willingness to pay and their value perception of the products. In particular, the concept of customer-perceived value is the difference between a prospective customer’s evaluation of the benefits and costs to purchase one product or service instead of the others.
All the aspects that the consumer perceive as positive are benefits, such as the value of a purchased product, the brand value that allows a certain life status, or a personal value that a specific product or service holds for the customer. On the other side, costs, are mainly consisting in the actual market cost of a product or service, which are added the costs to find the product, the information costs, evaluation costs and the costs of using the product itself.
The difference between these elements is often simplify to the difference between perceived value and price. For this reason if the price is higher than the costumer’s perceived value the product won’t be purchased or may be purchase in the future. Vice versa, the product is often purchased when the price is less than or equal to the perceived value.
How to measure value-based pricing
The perceived value measurement can be summarize in two macro-approaches (Busacca e Bertoli 2012):
- “Desk” measurement: estimates and assessments made by the company management on value perception, on individual product attributes, on choice criteria and on competitors analysis.
- “Field” measurement: specific analysis techniques based on quantitative and qualitative research to know the product value perception, the customers’ satisfaction and the relationship between all these factors and the price.
Obviously, the second method is more expensive, in terms of economic and resources, but on the other hand is more reliable and less risky, especially because compare to the desk measurement, it allows to remove the evaluation distortion and is based on tangible and measurable results.
Both methods can involve two different approaches for the consumers’ perceived value analysis: composition or breakdown approach. The composition approach it starts from the assumption that the value of a product or service is given by the sum of the value attributed to each attribute that composes the product. Therefore, the management or the quantitative/qualitative analysis based on this approach starts from the identification of the attributes that can affect purchase choice, then is needed to know the weight of each attribute and the evaluation of the customer value. In these cases the Fishbein technique is often use, whose difficulty is to evaluate the importance attributed to the individual elements.
Invece, l’approccio di scomposizione parte dalla considerazione che la percezione del valore possa essere scomposta in più valutazioni parziali riferite ai singoli attribuiti del bene o servizio. A livello pratico, quest’approccio prevede generalmente l’utilizzo della tecnica della Conjoint Analysis. Riguardo alla relazione tra percezione del valore e prezzo i modelli di analisi congiunta più noti e performanti sono il modello Van Westendorp o il modello Gabor-Granger, entrambi frutto di indagini esplorative realizzate sui consumatori.
The Conjoint Analysis models used by companies
The breakdown approach, on the other hand, starts from the thought that the value perception can be broken down into several partial evaluations referring to the individual attributes of the product or service. At a practical level, this approach generally involves the use of the Conjoint Analysis. The most known and well-performing methods about the relationship between perceived value and prices are the Van Westendorp model and Gabor-Granger model, both the resulting from exploratory surveys carried out on consumers.
The Van Westendrop model starts from the assumption that the price of a product or service derives from four price points:
- Minimum price: is the price below which many customers would be lost, due to the expected low quality and for which there is no profit due to the low price.
- Penetration price: is the price with a low rejection, in which the turnover can be maximize.
- Indifference price: balanced price perception, for most people will be between “convenient” and “expensive”
- Maximum price: is the price above which many customers would be lost.
In this way is possible to identify the costumer’s perceived value in order to understand the optimal price range. Knowing the psychological thresholds affecting the price is easier to define the demand.
The Gabor-Granger model reveals the price points to which the purchase probabilities drop significantly and allows direct comparison between different products. In this way a threshold price is identified, over than which the purchase probability drop. Thanks to this model is possible to identify the consumer sensitivity in relation to the price, through the elasticity calculation.
This method allows you to identify the price with a probability of purchase grater than 60% and the percentage of people who would buy at a certain price. In this way is also possible to evaluate the prices that should be increase and those correct, as well as evaluate which products is better to keep or not in relation with the customer’s perceived value.
Why calculate value-based pricing?
In conclusion, chose the right approach or model to use, become fundamental to correctly evaluate the customer-perceived value, and this is becoming more and more central, in an economy where the experience e the perception of the customers are necessarily among the main focus of pricing strategies and market positioning.