Value-based pricing in a downturn Understanding customer value and means of being profitable in a downturn
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Modifying the price of a product has the largest impact on EBIT of any business
activity and understanding what price is right for your product is essential. Value-
based pricing is a methodology which bases the price of products on the perceived
customer value. Consequently, comprehending the customer value of a product is
crucial to achieving the right price, and, in a downturn, customer value changes.
During this thesis, a literature- and empirical study was made to understand what
customer value is, how it is impacted by a downturn, and how value-based pricing
can be applied successfully in a downturn.
The studies found that the present understanding of value does not suffice when
assessing the relationship between price and value. Additionally, customer value
changes in a downturn in several manners such as an increased price sensitivity,
more focus on utility values and a smaller fixation on non-essential aspects of
products. Lastly, the studies arrived at that working with value-based pricing might
become increasingly difficult in a downturn since customer value becomes less
predictable.
In this thesis, a new value model is proposed where the relationship between value
and price is explained in a new manner where findings from the theory and empirics
are aligned. This model combines traditional value theory with prospect theory where
value consists of utility value, psychic value, and a subjective reference point.
Furthermore, recommendations on working with value-based pricing in a downturn
are presented where the need to constantly evaluate customer needs and working in
a resource efficient manner is accentuated.
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value-based pricing, customer value, downturn, price sensitivity, recession, pricing