Real-World Education for Modern Marketers

Join Over 600,000 Marketing Professionals

Start here!
N E X T
Text:  A A
PRO

The EVC Method: How to Price a Product from the Customer's Perspective

by   |    |  3,512 views

There are many approaches to pricing. These include cost-based, going-rate, target profit, cost-plus, and break-even approaches. When you think about it, all of these approaches to pricing a product are based on the company and its cost structure or on how the competition prices it products.

The Economic Value to the Customer (EVC) approach focuses instead on the customer and how the customer perceives the value of a product. With this view, the purpose of price is not to recover costs, but to capture the perceived value for the product in the mind of the customer.

One way to think about this concept is as follows:

Price Ceiling
Perceived Value
How much of the value-cost gap can you recover?
Price Floor
Costs

At the highest end of price is the perceived value of a product to a customer. This represents the price ceiling. Clearly, you can't price a product for more than a customer values it (except in perverse circumstances). At the other end is the price floor, and this is represented by the firm's costs. You won't want to price a product below costs (again, except in special circumstances, like when you have patient venture capital).

The question becomes how much of the gap between the perceived value and the costs you can recover? As you will see, this depends on a number of factors, including the prices of competitor's products and the extent to which customers have information.


Identifying the firm's costs is relatively easy, and one could (and should in many cases) use the variable costs of producing a product as the price floor. But how do you determine the price ceiling, or the EVC? A simple example will help illustrate this process.


Read the Full Article

PRO Membership is required to access this how-to marketing article. Sign up to read the full article and gain access to all of our PRO content!

Sign up for a 2-Day Free Trial  Learn more about PRO Membership

Allen Weiss is the founder and publisher of MarketingProfs.com. He can be reached at amw@marketingprofs.com.

Rate this  

Overall rating

  • This has a 1 star rating
  • This has a 1 star rating
  • This has a 1 star rating
  • This has a 1 star rating
  • This has a 1 star rating
1 rating(s)

Add a Comment

MarketingProfs uses single
sign-on with Facebook, Twitter, Google and others to make subscribing and signing in easier for you. That's it, and nothing more! Rest assured that MarketingProfs: Your data is secure with MarketingProfs SocialSafe!