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Article Essay

4946 words - 20 pages

Customer value-based pricing strategies: why companies resist
Andreas Hinterhuber

Andreas Hinterhuber is based at Hinterhuber and Partners, Innsbruck, Austria.

Introduction
Pricing has a huge impact on profitability. Pricing strategies vary considerably across industries, countries and customers. Nevertheless, researchers generally concur that pricing strategies can be categorised into three groups: 1. cost-based pricing; 2. competition-based pricing; and 3. customer value-based pricing. Of these, customer value-based pricing is increasingly recognised in the literature as superior to all other pricing strategies (Ingenbleek et al., 2003). For example, Monroe (2002, p. 36) observes ...view middle of the document...

Despite the obvious benefits of customer value-based approaches to pricing, a review of the literature suggests that these methods still play a relatively minor role in pricing strategies. It is apparent that various obstacles must lie in the way of a more widespread implementation of value-based approaches to pricing. The purposes of the present study are to identify these obstacles and to suggest guidelines for overcoming them. The next section of the paper presents the theoretical background for the study, including consideration of alternative pricing strategies and the frequency of implementation of these strategies. The research methodology of the present study is then explained followed by a presentation of the findings with regard to the major obstacles that prevent the effective implementation of value-based pricing. Remedies for these obstacles are also discussed.

DOI 10.1108/02756660810887079

VOL. 29 NO. 4 2008, pp. 41-50, Q Emerald Group Publishing Limited, ISSN 0275-6668

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JOURNAL OF BUSINESS STRATEGY

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PAGE 41

The wide array of pricing strategies
Cost-based pricing derives from data from cost accounting. Competition-based pricing uses anticipated or observed price levels of competitors as primary source for setting prices and customer value-based pricing uses the value that a product or service delivers to a segment of customers as the main factor for setting prices. Table I summarises the major characteristics of these various approaches. As shown in the table, each of these strategies has its strengths and weaknesses. The advantage of the first two methods is that data are usually readily available, but their disadvantage is that they do not pay sufficient attention to customer needs and requirements. Conversely, customer value-based methods do take the customer perspective into account, but relevant data are more difficult to obtain and interpret. Marketing researchers recognised the inherent problems of cost-based pricing approaches as long ago as the 1950 s. For example, Backman (1953, p. 148) notes that ‘‘. . .the graveyard of business is filled with the skeletons of companies that attempted to base their prices solely on costs’’. More recently, Myers et al. (2002) assert that cost-based pricing produces sub-standard profitability; similarly, Simon et al. (2003) contend that cost-based pricing leads to lower-than-average profitability. Ingenbleek et al. (2003) demonstrate the advantages of valued-based pricing. In an empirical survey of 77 marketing managers in two business-to-business industries (electronics and engineering) in Belgium, they find that customer value-based pricing approaches are positively correlated with new product success, whereas no such correlation is identified between new product success and the adoption of cost-based and competition-based pricing. The authors conclude that customer value-based pricing approaches are, overall, the best strategies to adopt in making decisions about new...

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