Why the Highest Price Isn't the Best Price

This is an MIT Sloan Management Review article. Many suppliers serving business markets believe that practicing value-based pricing means finding out what the value of their offerings is relative to alternatives for their customers and then charging as high a price as they can. But the authors suggest that "charging what the market will bear" isn't always the right strategy. Instead, they argue that an organization should tailor its pricing to a more robust market strategy. "Unfortunately," the authors say, "when stripped of jargon and word-speak the ' 'market strategy' for many businesses is simply' 'Sell more!'" To counter this problem the authors suggest several questions that an organization should ask to improve its pricing strategy, including: What is the marketing strategy in this segment? What is the differential value that is transparent to target customers? What is the price of the next best alternative offering? What is the customer's expectation of a "fair" price? By asking these questions and others, an organization can choose a price point that provides the largest long-term value to the supplier. The benefits of this approach include improved relations with customers that often lead to longer-term, more profitable relationships. Using this approach, customers are also more willing to collaborate with suppliers, which can lead to shared data and improved products. According to the authors, suppliers that practice this kind of value-based pricing boost profits not only in the present, but they also set themselves up to profit over the long term.

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