Friday, October 29, 2010
Many companies selling industrial products employ value-based pricing. By that, I mean they calculate the economic benefits for the customer of their product vs rivals' products. Many of those benefits occur over time, not just at the point of purchase. In those instances, firms must be very aware of the time horizon and discount rate of their customers. If they have a short horizon, if they are going to upgrade to a new product in just a few years, then that limits the benefits your product will provide, and limits the price you can charge. Similarly, if the buyer has a high discount rate, they will devalue benefits in the out years, decreasing their willingness to pay for your product. If a firm is selling it's product in developing markets where buyers have less access to capital, they may not be able to charge as much, because buyers will have much higher discount rates.