A case study of value-based pricing: “Italian prosecutors have uncovered that luxury fashion brands, including Dior and Armani, have been exploiting migrant workers in Italy to produce their high-end handbags at extremely low costs… The investigation revealed that a Dior handbag, which retails for $2,780, was produced for just $57. ”
Dior and Armani have modeled that their brands deliver so much value that they can put the price tags that high. It is all about understanding pricing psychology and the fact that people buy these products because they are expensive. So, the issue is not the cost of production, but the derivable value, and based on that capture value for the business.
Understand how to price your products.
A business model encapsulates the essence of a firm by providing the compass on how to create value in the company. It is the logic of a business and when you commit to one, you have committed all the factors of production in that business to a destiny. And as you execute that model, creating value in that firm, pricing becomes critical.
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Comment
Comment: “Hello prof. I am just thinking, the example of Dior here to my understanding doesn’t fit into the value based pricing strategy. I mean, what is the value derivable from Dior. I think it’s more of a value placing strategy as the price is based on the value the customer placed on the product rather that value been derived from it as I do not see any value derivable from those bag really”
My Response: “I think it’s more of a value placing strategy” . It is a luxury product and the value is that only few people can afford it. That is the value! For people to open their wallets to pay for it, they think there is value derivable from it. For Dior to put the price tag, it does think there is value it offers. If not, there would not be an attainment of equilibrium for transactions to take place. So, value is proposed and value is understood!
Yet, do not overthink this. If Dangote writes what you have written, Guardian will make it a leading cover story tomorrow. If what I am writing now is a comment from UN Sec Gen, the New York Times will publish this response. So, what is going on? It is not what is written that matters but the value derivable based on who wrote it.
Make that bag but if it is not Dior, it is not the same thing!
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