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Value Based Pricing

Anonymous A asked on Oct 10, 2018

Do anyone have a foolproof approach for value-based pricing?

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Benjamin replied on Oct 10, 2018
ex-Manager - Natural and challenging teacher - Taylor case solving, no framework
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Hi,
Not sure if we can apply a systematic approach. However I can explain the concept, this will for sure help to think about to proceed when in situation.

For value based pricing (by opposition to cost based pricing), you will define the pricing of your product / service based on the value it creates for the client. So you will always have to compare with the cost for him to proceed without your service / product.

Example 1 : Asusme you offer a service / product reducing the produciton cost

- Estimate the current of similar service / product paid by client

- Estimate how much he can save with your product /service : this could be FTE, raw material, energy, etc.

- Define your pricing based on the savings of your client

Example 2 : Assume you offer a high response service to fix production shutdwon

- Estimate the cost of prouction shut down / hour

- Estimate by how much you can reduce shutdown time with your service

- Define your pricing based on the above savings.

Hope this helps
Best
Benjamin

Vlad replied on Oct 10, 2018
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School
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Hi,

Value-based pricing can be done in 2 ways:

  • For existing products, you identify what it the economic value and perceived value for the customer. Also, you compare the value proposition and features of your product vs. the VP of your competitors. If you have a significant difference in value prop - you have to define how much value you propose to the customer in $ terms. (e.g. your product may have additional customer support, better packaging, additional features and thus should be priced hire. Or it should be priced the same and you will win the market share due to these differences)
  • For the new products, you can calculate the closest alternatives and think how much additional value we provide by replacing them. Think of the discount airlines compared to trains or buses

Best

Sidi replied on Oct 10, 2018
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 80+ candidates secure MBB offers
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I want to second what Benjamin said! This is the essence of what you need to understand. Just a clarification to avoid any confusion: we have to identify the value forthe client's customer (i.e., the user of the product), thereby deriving their maximum willingness to pay (WTP).

Cheers, Sidi

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