The Power of Pricing – From Price Taker to Price Maker

(Ibbaka's newest team member Rashaqa Rahman shares her insights from her first few weeks in pricing.)

Pricing is ubiquitous in our everyday lives yet pricing seems to be at the periphery of most business decisions. Before I started working at Ibbaka, I understood pricing to be the end-product of in-depth market segmentation and an analysis of business costs. Essentially, it was a cost-plus approach to pricing that I believed would “auto-magically” result in an optimal number that incorporated the customer’s willingness to pay and the most efficient cost levels.

Cost-plus pricing

Cost-plus pricing

That is not only a simplistic approach to pricing, but the wrong one. The cost-plus approach makes the seller the price taker, letting the market determine the price floor, the business costs determine the price ceiling and treats the customer willingness to pay as static. This overly simplistic approach more often than not leaves money on the table.

My thinking on pricing has shifted fundamentally since I started working at Ibbaka. I have learnt that pricing done right can be an incredibly powerful tool in the seller’s arsenal. Pricing lends value to the product and vice versa, and it shapes product perception. Pricing decisions are never one-off and determine a business’ current and future competitiveness, as well as the flexibility to respond to shifts in the market.

Value-based pricing focuses on the value of the offer to the customer as a way to determine pricing, rather than the cost of production. It shifts power to the seller and makes them the price maker as opposed to the price taker.

Our value-based approach to pricing at Ibbaka is focused on understanding the market and the value the offer provides to the customer:

Value-based pricing

Value-based pricing

The value-based approach to pricing puts customer needs and pain points, the buying context and the psychology of human purchase decisions in the spotlight. This model integrates the economic and the emotional value that customers derive from the product to derive a pricing strategy.

Customer willingness to pay is not set in stone, and can be shaped through proper value communication. The value-based approach brings the psychographic or the behavioral aspects of pricing to the forefront, so these can be leveraged to create and communicate value to the customer as well as shape price-value perceptions. This can further lend power to the seller.

In a nutshell, Ibbaka has taught me that markets are dynamic, so should prices be. Pricing is so much more that data sheets and number-crunching. Pricing done right is value to the customer quantified, buyer context specified and connects price to use and value.  Good pricing also takes into account cognitive, emotional and behavioral aspects of purchase decision-making. Strategic pricing facilitates where the business and the customer connect.