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“value-based pricing” As I understand it, the value is based on the customer’s perception of value. And I believe this is contrasted with hourly-based pricing.

“value-based pricing” As I understand it, the value is based on the customer’s perception of value. And I believe this is contrasted with hourly-based pricing. If I try to come up with an example, I might say the postal service has a value price. Mail a letter anywhere in the (continental) US, 0.55 You don’t pay 1.55 if it gets there sooner. Even if you overnight the letter, there is a flat fee. The extra cost for more difficult deliveries versus easier deliveries is a wash; the post office doesn’t charge you more or less. Hourly consulting, like for a winning advertising campaign—what is that worth? I don’t understand the remark suggesting value pricing is the more lucrative of pricing structures.

hn_throwaway_99 6y ago
Value-based pricing is used to imply that the price of the service should be proportional to the value the customer receives from it, not the cost it took for the consultant to implement the solution. Of course, with huge corporations, teeny improvements can be worth millions in value. So consultants working with these large corporations will usually prefer a "value-based pricing" model because if they can convince a customer that they can reap $100 million in additional savings or revenue (not unreasonable for a large company), they could easily charge, say, $40 million for it, but they would never be able to charge, say, $5000 an hour if that's what the timing worked out to be.
- xtiansimon 6y ago
  I take your point, "because...they can convince a customer they can reap $100 million in additional savings or revenue", this 'potential' revenue extends to the 'value' of the service, and the consulting agency should be allowed to take a proportionally larger share of this potential revenue as fee regardless if they are successful. I'm coming at this from small businesses, who don't usually have resources (MBAs?) to forecast revenue in the way you're suggesting. Again, my thought of value-based has a customer with a fixed opinion of the 'value'. You can't really get them to spend more money, because they don't perceive more benefit proportional to increasing cost. I'm asking, is my application of value-based consistent with the term as you use it? And if yes, on what _other concepts_ does the theory turn to distinguish your concept of fees proportional to the customer's potential revenue? What flips the interpretation of 'value-pricing' from a 'commodity' service, to your 'gambling' argument? If it's the uncertainty burden, then wow, that is some forecasting and salesmanship!
srtjstjsj 6y ago
Mail is 55c because it's a simple amortized cost of a unique government service with some margin. The value varies widely. Value pricing is when different customers pay different prices for substantially the same service, like first class vs economy airline tickets, and app store fees.

hn_throwaway_99 6y ago

Value-based pricing is used to imply that the price of the service should be proportional to the value the customer receives from it, not the cost it took for the consultant to implement the solution. Of course, with huge corporations, teeny improvements can be worth millions in value. So consultants working with these large corporations will usually prefer a "value-based pricing" model because if they can convince a customer that they can reap $100 million in additional savings or revenue (not unreasonable for a large company), they could easily charge, say, $40 million for it, but they would never be able to charge, say, $5000 an hour if that's what the timing worked out to be.

xtiansimon 6y ago
I take your point, "because...they can convince a customer they can reap $100 million in additional savings or revenue", this 'potential' revenue extends to the 'value' of the service, and the consulting agency should be allowed to take a proportionally larger share of this potential revenue as fee regardless if they are successful. I'm coming at this from small businesses, who don't usually have resources (MBAs?) to forecast revenue in the way you're suggesting. Again, my thought of value-based has a customer with a fixed opinion of the 'value'. You can't really get them to spend more money, because they don't perceive more benefit proportional to increasing cost. I'm asking, is my application of value-based consistent with the term as you use it? And if yes, on what _other concepts_ does the theory turn to distinguish your concept of fees proportional to the customer's potential revenue? What flips the interpretation of 'value-pricing' from a 'commodity' service, to your 'gambling' argument? If it's the uncertainty burden, then wow, that is some forecasting and salesmanship!

srtjstjsj 6y ago

Mail is 55c because it's a simple amortized cost of a unique government service with some margin. The value varies widely. Value pricing is when different customers pay different prices for substantially the same service, like first class vs economy airline tickets, and app store fees.