A basic need for companies is to price their products and to do this it is necessary to consider several factors. Concepts such as Customer Reference Price (CRP) and Economic Value to the Consumer (EVC) are fundamental in this decision making process.
Economic Value to the Consumer (EVC) is a value-based pricing method developed in 1979 by the economists John L. Forbis and Nitin T. Mehta. The method seeks to better understand a customer’s expectations and desires and then adjust the value of the product accordingly.
The goal of the method is to find a price that is compatible with the product and the market. You have to consider what the customer is currently paying and what your solution offers differently.
The Customer Reference Price (CRP) is the value the customer perceives as legitimate for a product that meets certain requirements. In other words, the value he believes is fair for that product.
How to use CRP and EVC for a pricing strategy
The marketing expert Phil Montgomery states that the concept of Economic Value to the Consumer is translated into the formula:
EVC = Reference Value + Differentiation Value
Different customer segments have different EVC’s, so to identify the reference and differentiation values it is necessary to understand how the customer perceives the product and what attracts them the most.
The reference value is calculated from the most likely substitute. The one that offers the most similar experience. From this, you take into account what differential you offer to the customer to arrive at a value that is consistent with your product.
One of the biggest advantages of this method is to reveal what is important for each customer segment, since each type of consumer has different needs at the time of purchase, classifying them as follows:
- Functional: when the product serves a certain purpose.
- Social: when the product satisfies a group’s demand.
- Symbolic: when the product allows the achievement of some status.
- Recreative: when the product represents a pleasurable activity.
Thus, the CRP must be built taking into account the unique characteristics the product offers. This customer expectation corresponds to the EVC, or the amount he is willing to pay for the difference. When the product has a value calculated on top of this market advantage, it forces competing prices to adjust accordingly.
Goals and advantages of the method
The goal of the method is to find a price more in line with the product offered. A process that takes into account EVC and CRP allows you to achieve better value than traditional methods based on cost alone.
With this method, you can achieve results such as:
- Determine the different elements that impact the consumer.
- Assign a value to each of these elements.
- Find the value of the nearest competing product.
- Having the benchmark and differentiation, set the best price for the product.
Using concepts such as CRP and EVC it is possible to perform a more strategic pricing, with results closer to the value that the customer is willing to pay and as a result, the methodology has positive impacts on revenue and brand positioning in the market.
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