Economics of value-based pricing

“One prominent feature of information goods is that they have large fixed costs of production, and small variable costs of reproduction. Cost-based pricing makes little sense in this context; value-based pricing is much more appropriate. Different consumer may have radically different values for a particular information good, so techniques for differential pricing become very important.”*

It’s no wonder that traditional marketing and advertising don’t work in digital space. Customers’ perceptions of value of a product/service and their expectations of the value they’ll gain are completely unrelated with the cost of creating that product/service. Companies’ value proposition thus needs to be correlated closely with consumers’ value perception. This value perception is shaped by Google-led commoditization of products/services, transparency of pricing, and social information — to a greater (much greater) extent than advertising. Key to success? Staying close to customer’s perceptions and expectations of value. That’s the path to sustainability; everything else has a short shelf life, literally and figuratively.

* From here.

Originally published on January 2, 2013