Determining the next best alternative price is an important factor of value-based pricing. The next best alternatives price serves a comparison point for companies when they determine a value-based price for their new products. Firms determine the value of their product or service by comparing to the next best alternative product or service. A product is seen as valuable if it has better features and performs better than other products in the market, regardless of what the alternative product actually costs.
"Can we include competitor prices into the price research?" is one of the more frequently asked questions at PriceBeam. The answer is a loud "yes", but sometimes the second question should be: do competitor prices matter?
The answer is "most of the time". But sometimes the focus is too much on competitors compared with the adequate attention to how you deliver value to your customers. Competitor prices do matter, because they set a reference against which your value is being compared. In value-based pricing models there is often a NBCA (Next Best Competitive Alternative) to which value drivers are added or subtracted, to arrive at the value of your own product.
But products also deliver value on their own. If your product or service helps your customers, it does so regardless if the competitor is priced high or low, or doesn't even exist. And this is where too strong a focus on competitive pricing can become an issue. In organizations overly obsessed with competitive prices there is a tendency to only focus on how their own price compares with that of the competition. Conversely, they don't focus enough on delivering independent value through product benefits and features.
PriceBeam's price research methods focus both on your own value-based pricing and customers' willingness to pay for that value, but also allows you to bring competitive WtP analytics in play. The outcome is a solid understanding of your own value and pricing opportunities, while keeping a health eye on the competition.
Transaction utility is a term coined by world-renowned behavioral economist Richard Thaler, based on a series of experiments he conducted with relation to creating utility via transaction design, and how this can be used to charge higher prices without losing out on sales. While the term was originally used to describe a few select biases, it is now used as a general term to describe value-adding (or subtracting) features that are not directly related to the product or service. Let's look at an example of how transaction design can change consumers' value perception:
Topics: Pricing Psychology