![]() It is difficult to apply it in larger businesses where employee skill levels may not be so high. This method tends to work best for smaller organizations that are highly specialized. It may even alienate some prospective customers. The high prices to be expected under this method will only be acceptable to a small number of customers. The following are disadvantages of using the value based pricing method: Only Applies to Niche Markets This advantage tends to also derive from the nature of the sales relationship, which needs to be both close and trusting before value based pricing can even be contemplated. Increased Customer LoyaltyÄespite the high prices charged, you can achieve extremely high customer loyalty for repeat business and referrals, but only if the service or product provided justifies the high price. Value based pricing results in the highest possible price that you can charge, and so maximizes profits. The following are advantages to using the value based pricing method: Increases Profits The company's clients do not complain, because they have obtained an average of $10 million each. There is no relationship between the fee charged and the cost incurred by ABC. The typical stock placement is for $10 million, for which ABC charges 5% this works out to an average fee of $500,000. The internal cost for ABC to provide this service is usually about 1,000 hours of staff time at a cost of $100 per hour, or $100,000 in total. The Value Based Pricing CalculationĪBC Legal has built up an investment banking service that assists its clients with preferred stock placements. The purchasing staff is more skilled in evaluating supplier prices, and so would be less likely to allow such pricing. Value based pricing is also more applicable to situations where customer approval is made at the executive level, rather than by the procurement department. Other areas where value based pricing may be an option include product design, bankruptcy work outs, cost reduction analysis, lawsuit defense, and pharmaceuticals engineering. ![]() Similarly, an attorney skilled in initial public offerings can use value pricing, since clients might not otherwise raise millions of dollars without their services. For example, an attorney experienced in defense against criminal charges can charge a high price to his or her clients, since the value to them of not being incarcerated is presumably quite high. Value based pricing is usually applied to very specialized services. It does not take into account the cost of the product or service, nor existing market prices. This approach tends to result in very high prices and correspondingly high profits for those companies that can persuade their customers to agree to it. ![]() Value based pricing is the practice of setting the price of a product or service at its perceived value to the customer. ![]()
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