Is Value-Based Pricing a Matter of Marketing or Customer Experience Design?

The question might seem superficial at first glance, but it’s more than just a matter of semantics. In my view, it has to do with your definition of value-based pricing (or value-pricing as it's sometimes called). 

​What Is Value-Based Pricing?

The definition I usually use is that value-based pricing is a set of methods and principles for charging for the value you provide. The goal is to capture more of the actual value you provide.

However, there’s an alternative definition that states that value-based pricing is about charging as much as the customer is willing to pay. The goal is to capture more of the value the customer perceives they are getting since the customer is the final arbiter of value.

There’s a small but significant difference whether we talk about actual or perceived value. It can be argued that value is subjective, so all value is actually perceived. But this doesn’t really address the issue as we also need to deal with perspective. This can lead to a bit of an ethical dilemma if your estimate of your offer’s value is lower than what the customer is willing to pay, making you feel like you’re cheating them. Reversely, when customers refuse to accept a price, it leads you to wonder whether the customer is capable of accurately estimating the value you provide.

The Power of Perceptions

A common and hypothetical scenario of value-pricing is selling water in the desert vs on a street in the winter. Parched and on the verge of death, your customers would mortgage their house for a drink. Putting issues of transportation and procurement costs aside, one could argue that it would be opportunistic to, as in this scenario, charge extra just because you can. Uber’s surge pricing is another example of this. The price of a ride with an Uber cab will fluctuate with demand. That policy has led to a lot of criticism even though it’s supply-demand in action, just in a highly visible way.

Now cab rides and water aren’t exactly comparable. The value of water in the desert isn’t just a matter of perceptions but very real. It can mean the difference between life and death. Charging a premium and using your bargaining position in such a way is something I find to be morally reprehensible. But for products and services that offer convenience, rather than means of survival, value is often a result of perceptions.

Marketing Creates Expectations

The way we create perceptions (prior to purchase) is using marketing. We can create unfounded expectations in the mind of customers and use that to gain pricing power. That power may however not last long if their experience doesn’t match what they were led to expect and disappointment will ensue. It’s a short-lived tactic as the customers will likely not return.

You might object that branding proves me wrong. That branding is about building some kind of ethereal quality to your business and that brand products often aren’t superior or competitors’ offerings yet still result in higher perceived value. Even if that were the case, building such a brand is a massive investment and such work involves more than appearances. It also needs to affect the business at so many levels that its influence goes beyond marketing. The insights into what drives customers will have an influence. It’s reasonable to assume that the effort of building a brand will increase the likelihood of positive customer experiences.

An Unnecessary Schism

Professionals, such as customer service developers and service designers, who work close to end users and their customer’s customers are often aware of the pain points and needs of these individuals. Their work relates to what happens after a customer has chosen a specific company. It’s a matter of heightening the experience after a “Which one?” choice. How these individuals judge that experience is highly influenced by what they were led to believe, the purview of the marketing department.