A Value-based Pricing Perspective on Value ... - Boston College

value in relative terms, as the maximum amount a customer should be willing to pay, assuming
full information about the product and competitive offerings. Anderson, Jain, and Chintagunta
(1993) define value in business markets as the “perceived worth in monetary units of the set of
economic, technical, service, and social benefits received by a customer firm in exchange for the
price paid for a product offering, taking into consideration the available alternative suppliers
offerings and prices” (p. 5). We adopt this perspective that value is perceived by buyers, and
usually is not equivalent to the actual value that buyers may in fact receive. The point of value
communication is to narrow this gap – between perceived and actual value.
<strong>Value</strong> communication works to the extent that your product or service creates value that
is not otherwise obvious to potential buyers but is nevertheless important to them. There are
many reasons why your value might not be obvious. The less experience a customer has in a
market, the more innovative a product’s benefits, and the more separated the purchaser is from
the actual user; the more likely it is that the value of product or service differentiation will be
unrecognized or underappreciated. For example, without a planned communication from the
seller, a business buyer may not have considered that your nearby distribution location and
resulting short time to delivery, could reduce or eliminate the need to hold inventories.
Moreover, if the buyer is unsophisticated, he may not have recognized the high cost of holding
inventories for your technology product for which industry prices decline on average by 15% per
year. In this case, explaining how quick delivery could reduce inventory costs by more than your
price premium could motivate a purchase that would not otherwise have seemed prudent. .
Still, even a well-documented case for the value of your differentiation will not have an
effect unless the buyers are motivated to listen. <strong>Value</strong> communication is effective to the extent
that buyers see the price as economically important. 1 The price is economically important when
the buyer is committed to getting “a good deal” or “the most for my money” as opposed simply
to making a purchase that meets the need. There are five reasons why people often make
purchases without a strong motivation to minimize cost of meeting their need.
• The Expenditure Effect—Some expenditures are just too small to justify serious thought
or effort to find the economically best deal, rather than simply to find a brand that meets
the need. In business markets, they are purchases too small to justify a purchasing
agent’s time. In consumer markets, they are called “impulse” purchases.
• The Shared Cost Effect---Some expenditures involve spending other people’s money, in
whole or in part. So long as travel expenses are within a business person’s expense
budget, for example, there is not much incentive to look for the best deal.
• The Switching Cost Effect—Some expenditures involve making a supplier-specific
investment before being able to gain maximum value. A business might have to train its
employees on the use of a particular software package. A consumer might have to
educate her lawyer, child-care provider, and hairdresser on her needs and expectations
before they can fully meet her needs. Unless these customers get some indication that a
price difference between brands exceeds this hurdle, they will repeat buy from the same
supplier without evaluating other brands.
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