Value Based Pricing: Difference between revisions
flush out the topic more complete what was left of my outline | THIS ARTICLE STILL NEEDS SOURCES!! but other than that this should suffice for now |
Reworked the how it works paragraph, and did some copy-editing on the rest. I think some rewording is also needed in the 'Why it is a problem' section |
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VBP (value based pricing) also known as VOP (value optimized pricing) is a practice where a business sets a price of a product or service based on | VBP (value based pricing) also known as VOP (value optimized pricing) is a practice where a business sets a 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 worked example== | ||
A consumer subscribes to service '''x''' for $4.00 | 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 info 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 service will increase the price offered to those customers (e.g. from $4 to $6 per month), without changing the price offered 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 costs. | ||
==Why it is a problem== | ==Why it is a problem== | ||
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==Examples== | ==Examples== | ||
Walmart & Kroger plans of using smart pricing on | Walmart & Kroger plans of using smart pricing on its in-person retail products | ||
Cloudflare charging you higher rates for the same plan as other users | Cloudflare charging you higher rates for the same plan as other users | ||
Revision as of 23:12, 12 April 2025
VBP (value based pricing) also known as VOP (value optimized pricing) is a practice where a business sets a 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 - a worked example
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 info 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 service will increase the price offered to those customers (e.g. from $4 to $6 per month), without changing the price offered 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 costs.
Why it is a problem
Artificial price raises
When renewing a subscription or purchasing an item, would you care it was subject to price hikes regardless to how much profit the company is already making? Certain services may have collected information about you that helps them identify how much you are willing to pay them or use 3rd party tools to approximate how much to charge you the consumer specifically.
Price gouging individual or specific consumer groups
With specific apps that you buy stuff from may collect your data without your consent. This allows companies to charge more for the same items that you may buy again later on. These apps likely also share this type of purchase history with other providers that share similar products for profit.
Targeted smart pricing with AI
When doing any type of transaction online or in person there could be some assistant watching you. This can vary from your appearance, type of diction, clicking patterns, chat logs with in the help sidebar, how often products are viewed and how frequently your 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
Walmart & Kroger plans of using smart pricing on its in-person retail products
Cloudflare charging you higher rates for the same plan as other users
Doordash charging users hidden fees based on how they use the app and what device they were ordering from