Difference between competitor-based and value-based pricing strategy

Hey there,

I agree with Sidi and Pedro on the conceptual nature of the question.

I disagree with Sidi on the notion that cases will always cover value-based pricing. In general, I'd be cautious with absolutes related to case interviews. You should go in there with an open mind as every case question or client problem could make for a good case, provided it is framed well.

I am saying this particularly in this context since, while at McKinsey, I worked on several pricing engagements with clients in non-differentiated, kind-of-commoditized industries, where the focus was either on

• cost-based pricing
• competitor-based

Based on those experiences, I would even say that it is more challenging to generate impact in such cases because you have less room to navigate. Other elements become more important in such situations, e.g.,

• Full cost transparency
• Real-time data accessibility
• Forecasting and planning
• Customer communication

Nothing is black and white in cases, as it is true for the real world as well. :-)

Cheers,

Florian

Value Based Pricing: It is indeed guided by the value brought to the customer. However the measure could be subjective or objective. A utility product brings value through the benefit from using the product. A luxury product brings value from the image/brand perception that it demands. A technology product brings value based on the man-hours it saves and errors it reduces. etc. etc.

Competitor Based Pricing: 90% of the time it would indicate one or more of the following:

• A price war AND/OR
• A market that is highly price sensitive AND/OR
• A product that is It is in most cases commoditized

10% of the time it means exactly the opposite. Competitors reinforcing each others prices upwards. And the best example is luxury goods. A higher priced luxury good indicates more value.

Which one should I use? In most cases it is some form of value-based pricing. Other pricing mechanisms such as willingness-to-pay, cost-plus, etc. are variations of value-based-pricing only. In most case-interviews the incremental benefit/value can be quantified along financial benefit, time benefit, effort benefit, etc.

Hi!

• “From what I understand, value-based is about capturing the value brought by the product to the customer.” → This is correct!
• “But competitor-based pricing is also about capturing the added value to the customer compared to other products.” → This WRONG! What you are describing is the same as above. But actually, competitor based pricing can also be called “Benchmark pricing”. So you just set the price in line with competitor prices, and then you migh add a premium or subtract a discount based on some quick heuristics like, e.g., brand power. But no detailed value-analysis! This would then be value-based pricing.

One extremely important hint: If the main case question is about which price to set, you will in 99% of the cases end up with value-based pricing. The reason is that pricing questions only make sense if you are talking about some sort of innovation in the product or service. Otherwise, there is no point in asking consultants about pricing, if we are talking about an established product, right? And quite frankly, competitor-based pricing and also cost-based pricing do not make for interesting case studies. The case would be over in 3 minutes if you just ask for the correct reference points. So make sure you understand how to set up a rigorous logic for valu-based pricing, and you are most certainly covered!

Cheers, Sidi

That is not correct. 
Competitor-based pricing is about pricing according to a similar product sold by a powerful competitor, disregarding other considerations of value or consumer demand.

In real life, prices take into consideration value, competition / substitute products, price-demand elasticity and costs, in order to maximize profit.

In practice, you  price according to the difference in value provided vs. the competition (unless there is no real competition), as long as it covers costs, and you are at a point where you would expect a relevant change in demand if you changed your price.

Hi there,

1) If we have a choice, we will always do value-based. This is because this lets us charge as much as possible (i.e. the customer's WTP). Think the first iPhone or a tourist flight to space.

2) Oftentimes we cannot do value-based. This is because there are other competitors in the market that we cannot differentiate from. For example, selling oil/gas or water.

- which one should I use when the product/service has competitors but is differentiated from them?

Value-based. This is a bit tricky, because you'll technically be within a band/range (i.e. a benchmark), but you'll value-base price your product within this range (think cars for example)

- how do I conduct each one in detail and how do they differ in the method?

This requires coaching :) (impossible to explain in-depth just via messaging)