Value Based Pricing

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 - 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 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.

Why it is a problem

Artificial price raises

When renewing a subscription or purchasing an item, would you care if it was subject to price hikes regardless of how much profit the company is already making? Certain companies may have collected information about you that helps them identify how much you are willing to pay, or used 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 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

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