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Value based pricing



I'm an advocate of pricing products based on the value they offer. It makes rational sense to ask the customer to pay an amount that he is likely to rather than a little above what it costs to make the product available for that customer. Usually, the best way to identify what a customer is likely to pay is by understanding what value the product offers her.

But there are certain kinds of products that make people take seemingly irrational decisions about the price they are willing to pay that have little relation to the value they get out of it. Whether it be the decision to buy jewelry, or buy a house, or work for Goldman Sachs, people don't seem to decide on the price they are willing to pay based on the value they derive. They just have a threshold limit up to which they are willing to spend.

When I see people buying houses for prices that they can never hope to recover in thirty years through monthly rental income, I feel that the decision to pay the over-valued amount is not based on value derived. This doesn't mean that people who do this are foolish, though. Quite the contrary. They define the threshold because they know that anything acquired at a price up to that threshold will give them a certain standing in their social circle that they aspire to have.

It should be the target of every brand to achieve such a place in the consumer's mind that they are willing to define a fairly high threshold price at which they are willing to buy the product. This gives the brand immense power when it comes to pricing. 

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