Value Based Pricing: Difference between revisions
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Value Based Pricing (VBP), also known as Value Optimized Pricing (VOP), is the practice of setting the price of a product or service based on its estimated value to a specific consumer. This practice effectively gauges how much the consumer values what they are paying for before resorting to a competitor or creating their own solution. | '''Value Based Pricing''' (VBP), also known as Value Optimized Pricing (VOP), is the practice of setting the price of a product or service based on its estimated value to a specific consumer. This practice effectively gauges how much the consumer values what they are paying for before resorting to a competitor or creating their own solution. | ||
==How it works== | ==How it works== | ||
A consumer subscribes to service '''x''' for $4.00. This is a service which offers movies, TV shows, and so on. To increase profits, the company may decide to collect | A consumer subscribes to service '''x''' for $4.00. This is a service which offers movies, TV shows, and so on. To increase profits, the company may decide to collect information about how specific users use the app, along with other data purchased from external sources (such as data brokers) about the individuals in question to build detailed profiles which can be used to predict how much individual customers may be willing to pay to maintain access to the service. Having identified the customers who are likely to have a higher tolerance for price increases, the company then increases the price offered to those specific customers (e.g. from $4 to $6 per month), while continuing to offer the lower price to other users. | ||
This is done under the assumption that the profiled individuals will be less likely to react to an increase in subscription costs, either because they don't consider the increase meaningful, or because they are not paying close attention to their expenditure. Even if some of the targeted group do cancel their subscriptions, the increased revenue from the remaining customers will likely more than offset the loss. | This is done under the assumption that the profiled individuals will be less likely to react to an increase in subscription costs, either because they don't consider the increase meaningful, or because they are not paying close attention to their expenditure. Even if some of the targeted group do cancel their subscriptions, the increased revenue from the remaining customers will likely more than offset the loss. | ||
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===Targeted smart pricing with AI=== | ===Targeted smart pricing with AI=== | ||
When doing any type of transaction online or in person, there could be some AI assistant watching you. This can vary from your appearance, type of diction, clicking patterns, chat logs within the help sidebar, how often products are viewed, and how frequently you're looking at them. By automating all of this into a weighted model can be used to target users automatically by assuming their income bracket and adjusting prices accordingly instead of paying a marketing department do it for them. Smart pricing is the new method many companies embrace to maximize profit while reducing expenditures | When doing any type of transaction online or in person, there could be some [[artificial intelligence]] (AI) assistant watching you. This can vary from your appearance, type of diction, clicking patterns, chat logs within the help sidebar, how often products are viewed, and how frequently you're looking at them. By automating all of this into a weighted model can be used to target users automatically by assuming their income bracket and adjusting prices accordingly instead of paying a marketing department do it for them. Smart pricing is the new method many companies embrace to maximize profit while reducing expenditures | ||
==Examples== | ==Examples== | ||