During my exchange term at Bocconi University in Milan, I took up this wonderful course called Pricing Management. The Professor teaching the course, Federico Rossi, had to convince the Bocconi administration to let him teach that course in his first year at the University. Lucky for me they agreed.

The entire course revolved around the idea that every product ought to be priced based only on the value that a customer derives out of that product. I will not go into the nitty-gritties of how to identify the value a customer will derive from our product, and how to handle different segments of customers of the same product that derive different values, in this post. Each product commands its own analysis to go down this path of value based pricing.

But the key aspect every marketer needs to keep in mind is the beauty of value based pricing. Since it is a difficult process to undertake, most marketers are satisfied to price their products in the same range that competing products are priced. Though the number is falling, some marketers still price their products a little (pre-determined margin) over the costs incurred. While this is very easy to do, it has the potential to be a hindrance to the business as price is one of the big driving factors of demand.

While I enjoyed the course from an academic perspective, I came across this article about Honda looking to shut down Jazz, and started smiling when I recollected that this is precisely what we (those part of the Pricing Management course) predicted during the course.

While we might still read outdated textbooks that list cost-based pricing as one of the pricing techniques, it is time for marketers to shun the old and ineffective way and focus on value-based pricing.