Value-based pricing in a downturn Understanding customer value and means of being profitable in a downturn

Abstract

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.