Value-based pricing is a pricing strategy that is directed at a specific customer. When utilizing this strategy, the product must be customer-oriented and customizable in accordance with the customer’s needs. Depending on the target customer, a company can determine what costs can be incurred and the ultimate price of a product. According to Andreas Hinterhuber, “The customer value-based pricing asks, how can we create additional customer value and increase a customer’s willingness to pay, despite intense competition?”
To do this they base the price on the customer’s perspective of uses and potential coverage for fixing your price. One of the challenges that come with this strategy is that this type of pricing structure can result in many customers paying higher prices, while others accrue larger benefits from lower prices. As a result, a service provider may unintentionally award unnecessary price reductions to clients who may be willing to pay more. For Healthcare, one example of value-based pricing can be found in insurance companies.
Insurance premiums are increased each year. They target a specific customer base on income. For example, my premiums and out-of-pocket expenses, increase each year, yet, I cannot conclude that my doctors are not seeing this increase in their profit. However, the insurance providers are making a huge profit. This is a challenge that is not easy to fix, it will take competition from different insurance companies who are determined to provide their product at a lower price.