Setting Prices Based on Customer Value

Andreas Hinterhuber (top) and Stephan Liozu write that pricing scholars lean toward customer value-based pricing. They provide a mini case study of how to use this method to make sure that you don’t leave money on the table.

Could you be charging 25% more than you do right now?

Companies generally use one of three methods to set prices, but many pricing scholars think one of those ways is preferable.

Here are some excerpts from Andreas Hinterhuber and Stephan Liozu’s recent MIT Sloan Management Review article “Is It Time to Rethink Your Pricing Strategy?” about how one company came around to a new strategy.

Three pricing strategies are most common: cost-based pricing, competition-based pricing and customer value-based pricing. The authors write: “academic research and our own findings conclude that pricing approaches across industries, countries and companies usually fall into one of [these] three buckets.”

Pricing scholars lean toward customer value-based pricing. As the authors put it, this is often “the most preferable way to set new product prices or to adjust prices for existing products,” and is especially relevant in highly competitive industries. “Customer value-based pricing asks, ‘How can we create additional customer value and increase customer willingness to pay, despite intense competition?’ The subjective and quantified value of a purchase offering to actual and potential customers is the primary driver in setting prices.”

Mini case study: A large European supermarket chain that “planned to launch a private-label version of a yogurt delivering health benefits.” According to the authors, the company used information from cost accounting and a cost of goods of €1.29 to initially choose a retail price of €1.99. This compared well to the €2.99 cost of the branded product. But was it the smartest price?

The yogurt company did not initially pick the right selling price because it didn’t use data on the perceived customer value of the product as the main factor for its decision. That was Hinterhuber and Liozu’s conclusion after the company’s CEO solicited their view (Hinterhuber is a partner at Hinterhuber & Partners, a strategy, pricing and leadership consultancy based in Innsbruck, Austria, while Liozu is president and CEO of Ardex Americas, a manufacturer of specialty cements and substrate preparation products, and a doctoral candidate in management at Case Western Reserve University).