Value-based pricing, also known as target pricing, takes an integrated approach compared to simple plus pricing. It involves a series of steps, starting with thorough market research to estimate the potential selling price of the item. To make the pricing process easier and simpler, you can turn to professionals, such as Priсeva by https://priceva.com/blog/target-return-pricing and read more about the target return pricing and a lot of other useful information on their blog.
The research involves identifying competitors' pricing strategies and assessing prevailing market prices for similar products. Subsequently, the company selects a competitive price for a specific product and, based on research results, sets an overall target budget for its production. In addition, the company determines the desired profit margin on the product.
Using these numbers—sales price and profit margin—the company evaluates whether it can produce the product at a low enough cost to be profitable. Total production and sales costs must be within the target budget; otherwise, the company risks operating at a loss.
Target pricing provides a number of advantages:
1. Higher profit potential. By reducing production costs, companies can achieve higher profits through target pricing strategies.
2. Stimulates innovation. The desire to reduce costs and increase efficiency in the production process stimulates innovation and creativity within an organization.
3. Adaptation to market changes. Establishing a fixed selling price early in the target pricing process allows a company to quickly respond to market fluctuations, such as changes in supply and demand or changes in consumer trends.