Value-Based Pricing: Two Easy Steps To Implement And Two Common Pitfalls To Avoid | Forbes

Value-based pricing is a technique for setting the price of a product or service based on the economic value it offers to customers. This pricing strategy allows companies to capture the maximum amount that a customer is willing to pay in order to significantly improve company profits.

Product managers, especially in B2B settings such as industrial products, often adopt a cost-plus pricing technique that can seriously impact both revenue and profitability. The cost-plus approach is inefficient because prices may be set too high or too low, based on the cost of the product. If prices are set too high, then the company will lose the business to competition. On the other hand, if prices are set too low, the company will leave money on the table. Product managers can use value-based pricing to solve this issue.

To understand value-based pricing, let’s first understand True Economic Value (TEV). TEV represents what a customer will pay for a product or service that delivers value in excess of its closest competitor.

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Value-Based Pricing: Two Easy Steps To Implement And Two Common Pitfalls To Avoid.