So far we have been discussing what is cost based pricing. We also saw an example. Now let's look at what is value based pricing. Now value based pricing from one perspective is essentially to sell at a price that the customer is willing to pay. Now the important thing here is the customer is willing to pay the price, the price the customer is willing to pay. Now, the customer will be willing to pay a price for the quality of the product and attributes similar to that.

So, we have to find the price or the customer is willing to pay and base our pricing on those parameters. Many consider the book title marketing management by Kotler and Kotler as the Bible of marketing management. Now, in this book, Kotler and kotla has a very small section on value based pricing. From this book, I quote, what Kotler and Kotler is defined as value based pricing. They say that when a company wins loyal customers by charging a fairly low price for high quality offerings, it is referred to as value based pricing. Further, they state that value based pricing is not a matter of simply setting lower prices, it is a matter of reengineering the company's operations to become a low cost producer without sacrificing quality and lowering prices significantly to attract large number of Valley conscious customers.

Now, Kotler and Kotler has given the definition based on their experience towards mass producing companies like Procter and Gamble, Goodridge etc. Now, what it means for a company which is dealing in projects, like firms like ours, who deal in providing software solutions as projects. Now here, we could look at value based pricing from another perspective, we could define it as charged the customer for product or service based on what value the product or service offers to the customer, that is what is the productive service providing to the customer in terms of value that proportionate to that we should charge the customer a price for giving that system or solution to them. Now, let us refer back to the RTL case study there we saw that if he did a cost based pricing, the cost what Siemens got actually for the for providing the GPRS billing system was a negligible amount compared to the value what reliance derived out of that solution.

So, in the very first place, it seems like CNN should have considered value based pricing and seen the business case based on the price of the system should have been kept for reliance, or Okay, the negotiations it's a separate chapter, but the target price what cement should have target Get it to get in the very first place from a system like the GPRS billing system should have been higher as compared to what the determined through their cost based pricing. There. Let's look at one example of value based pricing in the current world. Now Google AdWords, Google AdWords provides its services to customers and tells the customer what they are willing to pay. The customers basically state to Google AdWords, what they're willing to pay for placing their ads on Google. Now, Google takes the customer's price as the customer states however, the customers who are willing to pay more Google place their ads more prominently or more frequently.

So essentially, Google is taking the price from the customer and providing the service the quality and quality and delivery etc. Based on the price which is the highest, having defined what is valid based pricing. Next let's look at how to implement value based pricing, and what are the considerations we need to take so that we're able to apply value based pricing.