It can be set at any point between a firm’s cost of production and its customers’ willingness to pay. As such, price is the point on the value stick that a firm has the most control over. Price refers to the final price a company charges when it sells a product or service. This is the level of goodwill, loyalty, and brand enthusiasm the customer feels after making a purchase, which is typically tied to the value they’ve claimed from the transaction. The difference between the customer’s willingness to pay and the final price of the purchase is known as customer delight. This could not only deter current and potential customers, but also affect your business’s impact on the competitive market. Charging even a cent above heightens the risk that customers will decide against purchasing. Customers are more likely to make a purchase when companies charge any amount up to that threshold. Willingness to pay is the highest price a customer is willing to pay for your product or service. Here’s a more in-depth look at each component. Where on the stick each of these points falls determines how a sale’s value is split between a firm, its customers, and suppliers. The value stick comprises four components: willingness to pay (WTP), price, cost, and willingness to sell (WTS). At the bottom of the stick is the value captured by the firm’s suppliers, called supplier surplus. In the middle is the value captured by the firm, called the firm’s margin. At the top of the stick is the value that’s been captured by the end consumer, called customer delight. The value stick is a visual representation of a value-based pricing strategy’s different components. The value stick framework offers a helpful way of visualizing the tenets of value-based pricing and how firms can maximize profit margins while creating more value for customers and suppliers.įree E-Book: How to Formulate a Successful Business StrategyĪccess your free e-book today. “Value for customers is the difference between their appreciation of a product or a service and what they have to pay for it,” says Harvard Business School Professor Felix Oberholzer-Gee in the online course Business Strategy. Value-based pricing is a business strategy that primarily relies on customers’ perceived value of goods or services to determine cost. Below is an in-depth examination of value-based pricing, including an overview of the value stick framework and the different components that make it so effective. Whether you’re a new product manager about to launch a product or service, an entrepreneur getting your venture off the ground, or a business leader reevaluating your company's direction, it’s crucial to have the right business strategy to maximize profits.Ī value-based pricing strategy offers your organization a practical path forward.
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