Distinguishing price from value

Last modified:

Thursday 31 October 2019

Customers are good negotiators, and market competition can be ruthless. Prices that are too high may cause you to lose customers; prices that are too low may give the impression that your products are of poor quality.

Introducing a "profitable" pricing strategy requires much more than a simple rational arithmetic calculation between the purchase price, fixed costs, variable costs, and profits. You should develop a pricing policy which also focuses on discounts, bonuses on turnover granted to any distributors, credit and payment conditions, etc.

In short, setting the "right price" has a big influence on your company's profits. This is the only element of the marketing mix that generates income (the Product, the Promotion, and the Position all involving costs) and that is the most easily adapted to changing market circumstances (such as the arrival of a new competitor)

Price vs. value

The notions of "value" and "price" are intrinsically linked.  The price is the sum of money in exchange for which a product or service is sold, and represents the value of this product expressed in monetary terms.

However, the price of a product may deviate significantly from its value.  The consumer interprets the price as the expression of a series of advantages that the product or services offers in comparison with other similar products or services.

The concept of "value" can be expressed as follows: value = advantages - costs.

Costs can be established objectively; this is not the case for the advantages.  Each customer will evaluate the advantages of your product according to their own view of the world and will assign a different value to your product/service.  Therefore, the value is subjective, situational, indissociable from the time of buying, and dependent on the market conditions.

Given that the added "value" of a product/service can be evaluated differently for each individual, many companies present on the market try to divide it into segments, which is to say: divide it into more or less similar groups of individuals who have largely the same objectives.  They then adapt their product/service to these different groups.

If you are unable to set the price of your product or service as an entrepreneur, this means that you do not have a clear enough vision of the value you are offering the customer.  A customer base study is recommended in this case. 

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