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Pricing Tool: The Value Pricing Framework
The Value Pricing Framework provides managers & entrepreneurs with a comprehensive and versatile approach to think about pricing strategy.
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The Value Pricing Framework is a broadly applicable, flexible approach to making and evaluating pricing decisions. It is equally suitable for a startup whose founder is starting to think about pricing, as it is for an established corporation with many business units and a complex portfolio of goods and services. The Value Pricing Framework can inform managerial thinking about a variety of pricing issues.
The framework begins with the four pricing decision inputs, the so-called four pillars of pricing (see figure below). Of these, three inputs help to establish the price, and the fourth input regulates the first three. The three inputs include the company’s costs that are relevant to the pricing decision, the customer’s monetary valuation of benefits delivered by the product, and reference prices that customers use to make buying decisions. The fourth input, the business’ chosen value proposition dictates how costs, customer value, and reference prices are weighted in the pricing decision.
At the framework's center are two types of pricing decisions, set a new price and change a current price. A vast majority of pricing decisions involve changing price. The opportunities to set a new price are few and far between; entrepreneurs are more likely to get them than managers in established companies. This means that the company's historical prices and pricing strategy set relatively rigid constraints, at least in the short term, for changing prices.
Furthermore, pricing decisions involve the consideration of two aspects of price: the price level, defined as the average price charged, and the price structure, which is the overall assortment of prices, price-benefit combinations, price variations, and price offers for the product. Asking prices or listed prices reflecting the price level are more visible but designing a price structure carefully is a far more potent driver of pricing success. (A detailed discussion about price level and price structure is available here).
There is often a significant gap between the quoted or listed prices in catalogs, sales pitches, store shelves, and websites and what customers pay
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