The Value-Based Pricing Guide

Value-based pricing is used by a wide variety of businesses, from companies selling luxury cars and trendy handbags to those offering brand-name clothes and premium software. In each case, the company selling the product or service did not simply add a specific profit margin on top of its production costs to determine prices, but instead based its prices on the perceived value of the product or service to its customers. Many times, the pricing strategy works well. The seller often earns a more significant markup on its products and services, and the buyer is comfortable paying prices that reflect the worth of the merchandise to them.

But just because value-based pricing is ubiquitous doesn’t mean it’s necessarily easy to execute. In fact, it’s often considered the most complex of the pricing approaches. What’s more, if it’s not implemented appropriately, it can backfire and negatively impact customer satisfaction and sales. So understanding when value-based pricing is applicable and following best practices for creating and maintaining an effective value-based pricing process is key.

Applied appropriately, successful value-based pricing can deliver a variety of benefits beyond the goal of greater profit margins and revenues. The work involved in understanding customers’ wants and needs and communicating regularly with them can foster closer connections, increase trust and inspire greater loyalty. In addition, the insight gathered during the value-based pricing process can improve a company’s marketing, sales and customer support. Plus, the focus on what customers value can also fuel the development of more innovative and successful products and services.

What Is Value-Based Pricing?

Value-based pricing is a strategy that assigns prices to goods or services based on their perceived value to customers. Essentially, the approach centers on a business charging customers the price it determines they are willing to pay for a specific offering.

A value-based pricing model offers a clear benefit for businesses, affording them the ability to charge a premium for their products and potentially boost their revenues. However, value-based pricing is as much an art as it is a science and typically requires more effort than other, more straightforward pricing models, such as cost-plus, competitor-based or demand-based pricing strategies. In fact, should a company miss the mark with its value-based price points, the strategy can have a negative impact on customer perceptions, sales and, ultimately, the company’s overall financial performance, so it’s important for companies to implement the strategy carefully.

Key Takeaways

• The value-based pricing method assigns prices to goods or services based on their differentiated worth to a segment of customers.
• Value-based prices are often used when the customer’s perceived value of the offering is high.
• Value-based pricing is a more customer-focused approach than cost-plus, demand-based or competitor-based pricing alternatives.
• Many types of products and services take advantage of value-based pricing, such as highly specialized products, customized solutions, luxury items and products that offer a significant return on investment.
• Successfully implementing value-based pricing requires investing in regular customer and market research, analysis, messaging and marketing.

Value-Based Pricing Explained

When a company takes a value-based approach to pricing a product, it is essentially attempting to put a dollar figure on the differentiated worth of its offering to customers, rather than applying a standard markup on its production costs, for example, or using competitors’ prices as the primary driver for setting prices.

The most obvious example of broadly applied value-based pricing is in the luxury goods space. Designer apparel companies, for instance, estimate that their customers will pay more to wear their labels than other clothing brands, even if it may not cost the apparel-maker much more to manufacture the items. However, value-based pricing doesn’t make sense only for high-end consumer brands. Companies that sell a niche product with no competition can reasonably expect that customers will be willing to pay more for the item because it offers the only solution to a problem. Similarly, if a particular product or service provides customers with a significant return on investment, it may be reasonable for a business to set prices based on that guaranteed payoff. Solar panels, for example, may be value-priced because of their ability to provide a certain level of return to customers that install them, since the panels may lower the cost of customers’ utility bills.

Companies may also opt to assign a value-based price to a product because it is clearly unique in a positive way from alternatives available in the marketplace. An electronics manufacturer, for example, may find that customers are willing to pay more for a smartphone’s sleeker design or more intuitive user interface. Value-based pricing may also make sense for items sold during particular circumstances. For example, captive customers at a concert arena or baseball stadium may be willing to pay significantly more for a hot dog and soda at a concession stand than they would spend for the same products at a grocery store.

Typically, companies that use a value-based pricing process will charge customers at a higher price point than if they were to take the cost-plus approach. But that doesn’t necessarily mean customers will pay that higher price. Successful value-based pricing hinges on the company’s ability to accurately evaluate how much its products and services are worth to customers, as well as how skillfully it galvanizes its organization to clearly articulate and deliver that value to the marketplace to satisfy customers.

Value-Based Pricing vs. Other Pricing Strategies

Value-based pricing differs from three other common pricing methods(opens in a new tab): cost-plus pricing, competition-based pricing and demand-based pricing.

Cost-Plus Pricing

With this strategy, a company will add a certain markup on top of the costs of making the product to establish its price. Cost-plus pricing is one of the simplest, most straightforward pricing approaches, since the price is mainly determined by the cost of producing the item, and then a certain percentage is added as a markup. Although this strategy’s intention is to allow the company to cover all its costs and earn a certain amount of profit, many businesses face challenges in fully calculating all costs, and companies may have trouble raising prices without upsetting customers when costs shift.

Competitor-Based Pricing

When taking a competitor-based pricing approach, a business will set prices based on what its competitors are charging for similar products, whether by undercutting them by charging customers less, matching their prices or charging more than the competition. This is another relatively simple approach to price-setting, as it requires research only into how competitors are arriving at a reasonable price for a product or service. Keeping a close eye on competitors’ prices can be helpful, particularly if a company is unsure how to price its products and is wary of significantly overcharging or undercharging for merchandise. However, if a company is seeking to differentiate its product in the marketplace, competition-based pricing may not be the best approach.

Demand-Based Pricing

Sometimes called dynamic pricing, a demand-based strategy uses market demand to determine the price of a product or service. High demand drives higher prices and low demand leads to lower prices. This allows a business to make more money on a product or service when demand surges and potentially drive increased sales with lower prices when demand slumps. This approach has become more popular as digital technology has made it easier to quickly determine and alter prices, depending on shifting levels of demand. The hospitality industry, which seeks to make the most profit on its limited inventory, is a robust user of demand-based pricing, with hotels often charging guests more during peak seasons. One of the biggest drawbacks is the impact on customers, who may balk at frequently changing prices.

In short, unlike demand-based pricing or competitor-based pricing, both of which base pricing on external marketplace factors, or cost-plus pricing, which looks internally at how much it costs to make a product and then layers a profit margin on top, the value-based pricing model looks to customer value as the primary benchmark for price-setting.

When to Use Value-Based Pricing

While value-based pricing may seem like a logical way to price goods and services because it aims to align the price of a product with its worth to the customer, it’s not the best option for all businesses. Companies selling highly commoditized products, like milk and flour, that are relatively indistinguishable from those offered by rivals, for example, might be better off opting for a cost-plus pricing model, since it may be difficult to define a unique value proposition for goods with only minimal differences.

Yet value-based pricing is a good choice in a variety of scenarios: when products are associated with a certain level of prestige or craftsmanship, for example, or for one-of-a-kind solutions or emotional purchases, such as diamond engagement rings. Companies often use a value-based pricing strategy on:

Highly Differentiated Products or Services

A company with offerings that are distinct or are a marked improvement over alternatives available in the marketplace is in a good position to implement value-based pricing. A vegan or ethically sourced cosmetics brand, an air carrier known for its exceptional customer experience, an automaker with cutting-edge technology or superior craftsmanship —all are examples of companies that could apply value-based pricing to their distinctive offerings. The key is being able to articulate the unique value of a product to customers, price the item appropriately and deliver on that differentiation.

Niche Solutions

When a company offers the only product or service that solves a particular problem in a specific market, value-based pricing is often the best choice. If customers have a demonstrated need for the offering, they are likely to be willing to pay more for it since there will be no other options. For example, a business consultancy with renowned expertise in dealing with a prevalent but tough-to-solve industry challenge may charge clients not simply for time and materials but for the value they bring to the table as rare subject-matter experts.

Purchases With Clear ROI

Sometimes the value that a product or service can deliver to a customer will come in the form of allowing the customer to recover actual dollars and cents. This may be the case with certain types of business software, for example, that automate and speed manual processes and improve employee productivity. The recent surge in consumer spending on hybrid vehicles is another example of value-based pricing. Customers are willing to pay more to purchase electric cars, partly because they are able to recoup some of that extra cost by saving on gasoline fill-ups at the pump.

Luxury Goods

While luxury goods may, at times, cost more to manufacture, their higher prices reflect more than those extra production costs. Consumers are often willing to pay more for the status that comes with owning exclusive, extravagant luxury items, from handbags to home goods.

Customized Solutions

Tailoring a solution to a customer’s needs often bestows significantly more worth to the purchaser, making value-based pricing a good fit. A business that offers customized products or services would recoup not only the additional costs required to offer the personalization but also build in a premium on top of that. For example, allowing consumers to customize their sneakers may cost the manufacturer more than its mass-produced versions, but people who are passionate about sneakers may be willing to pay considerably more for the option.

How to Implement Value-Based Pricing

While value-based pricing can offer a number of potential benefits — most notably, improved alignment with customers’ value perceptions and larger profit margins — implementing the approach can be more complex than assigning cost-plus prices or tying pricing to demand.

Many companies fail to devote the appropriate resources to their pricing strategies, but those that do see appreciable returns. In the software industry, for example, higher-growth companies are 1.4 times more likely than companies with lower growth rates to devote more than 10 full-time employees to product and strategic pricing, according to McKinsey.

This is especially important when it comes to value-based pricing. To most effectively determine the right price to charge based on perceived customer value, a company will need to take the following steps:

1. Conduct customer research and segmentation.

Not everyone will want to pay value-based prices. Understanding the customers that will and how best to appeal to them is key. So, the first step in implementing value-based pricing is to define the target market, segmenting customers based on needs and preferences, and determining what they’re willing to pay for certain products and services.

For example, an electronics manufacturer seeking to implement value-based pricing for its big-screen TVs would research big-screen TV buyers specifically. The company may also use surveys, focus groups, interviews or customer behavioral data to dig deep into what these customers value most, what their biggest pain points are with their current TVs or how they perceive the company’s products. Many companies find that developing buyer personas can be useful when making value-based pricing decisions.

2. Evaluate the product’s value proposition.

At a high level, the goal here is to determine the product’s differentiated worth; in other words, the additional value customers perceive they will get for the money they spend on an item. This value proposition may be based on what sets your product apart from the next-best alternative (the performance differential) or, in some cases, the absence of any alternatives. In the example of the electronics manufacturer implementing value-based pricing on a big-screen TV, it may be only that it offers a particular size in the category, or it may have a proprietary technology that delivers better resolution, for instance. The point is to identify the product’s unique features, plus any associated services, such as fast delivery times and free returns, to evoke the kind of warm feelings in customers that may permit a company to fetch a premium in the marketplace.

3. Perform a competitive analysis.

Although value-based pricing is distinct from competitive-based pricing, gathering intelligence about the competition can help inform the pricing process. When customers have options, comparing a product or service with the next-best alternative can clarify its value drivers, as well as pinpoint what customers are paying for other offerings in the same category. How do features, performance, customer service and prices stack up? Analyzing what customers may value about a company’s product compared to rival products will not only help a company determine the dollar value that represents what makes the product distinctive, it will also inform plans for future product improvements that will continue to appeal to customers.

4. Develop the pricing model.

At this point, the company should have a rich array of insights to help decide on the best pricing model for the product. While the business may have started the process with the intention of implementing value-based pricing, it’s essential to consider whether the alternatives (i.e., cost-plus, competitor-based, demand-based) might be a better fit. Companies that have established that their product or service offers a clear, differentiated value that a specific segment of customers would likely be willing to pay for can move ahead with the next step in value-based pricing implementation.

5. Determine the price points.

Having confirmed that value-based pricing is the best approach, it’s time to put a dollar figure on that perceived customer value, using the data from a company’s market and customer research. The aim is to decide on a price point that accurately reflects a product’s value to its customers — in other words, how much customers are willing to pay for it. Starting by taking the cost-plus approach to ensure that the company covers its costs and makes a profit, pricing decision-makers can then layer the value-based portion of the price on top of that. Companies can use a variety of methods, such as value estimation, value mapping, customer interviews or conjoint (survey-based) analysis, to estimate what customers may be willing to pay for each value driver.

6. Test and validate pricing.

Of course, the best people to judge what a customer is willing to pay based on the perceived value of a product are the customers themselves. Yes, the goal of this research and value estimation methodology is to home in on the best value-based price, but it’s also essential to test and validate potential prices. That hypothetical electronics manufacturer may determine that customers are likely willing to pay $100 to $250 more for its extra-large big-screen TV with higher resolution, but deciding which specific price resonates most with customers may involve some trial and error. However, experimenting in the marketplace can be costly: Overestimating the value-based price can result in missed sales, while underestimating may leave profits on the table. Many companies find that some A/B testing of value-based prices with customers can help them figure out the pricing sweet spot.

7. Communicate value.

Just as important as conducting foundational testing is clarifying why a product would be worth a higher price to customers. This step will likely involve a variety of marketing approaches to convey the value proposition most effectively to would-be customers.

8. Adapt as needed.

Value-based pricing is not a one-and-done affair. Using the strategy doesn’t mean the price will remain fixed. It’s critical to monitor sales performance and customer sentiment, refining the value-based price as needed to achieve and maintain the optimal equilibrium between perceived value and the appropriate price point.

Value-Based Pricing Challenges

Value-based pricing has the potential to provide businesses with significant benefits, from greater profitability to increased alignment with the qualities customers value most. However, because it is a more complex and qualitative pricing strategy than most alternative approaches, it often comes with some challenges.

Some of the most common hurdles that companies face when implementing value-based prices include:

Customer Perception

The way a company markets a product and how customers perceive it is especially vital to the success of a value-based pricing strategy, compared with other pricing models. Because value-based prices are often higher, the perceived value must be evident. When it is not, customers may balk at the premium, avoid purchasing the product and even lose respect for the brand. Companies moving toward value-based pricing may experience a certain amount of resistance from customers, especially if they are used to other (lower) pricing models.

Companies can mitigate the risk of customer objections by anticipating and addressing concerns proactively. Many value-based pricing experts also suggest that companies offer incentives or value-added services, such as free shipping on online orders, to attract customers and ease them into value-based pricing. It’s also essential that companies coordinate and roll out value-based marketing efforts and sales techniques in conjunction with value-based pricing.

Competitive Response

Companies need to closely monitor their competitors’ response to value-based pricing. In some cases, competitors may use a company’s value-based prices as an opportunity to woo customers away by offering lower prices. It’s important to remember that basing prices on value can be a tough sell if rivals are offering similar products at lower prices. Competing brands may also attempt to cut down your value proposition with their own marketing. Companies that implement value-based prices must keep an eye on their rivals and adjust their strategies accordingly.

Market Dynamics

Value-based pricing doesn’t take place in a vacuum. Companies should be prepared to make changes based on competitive responses, as well as by keeping tabs on marketplace trends. Market dynamics can significantly impact how much customers are willing (or able) to pay for a particular product — even one that has substantial perceived value. Pricing a product too high at an inopportune time can limit a company’s traction. It’s critical to monitor market trends and adjust a value-based pricing strategy and rollout, when necessary.

Best Practices for Effective Value-Based Pricing

The adoption of value-based pricing is a complex and often time-consuming process. Because the strategy is, in many ways, a more qualitative method of determining an appropriate price, it requires more research and skills than other methods, such as using psychological pricing tactics. It also demands ongoing diligence to evolve the pricing strategy over time amid changes in customer needs, market dynamics and competitive pressures.

Companies may want to consider some best practices to increase the likelihood of successfully adopting value-based pricing for a product or service. Companies that decide to implement the value-based pricing approach should:

• Conduct extensive market research. One of the most time-consuming and costly aspects of successful value-based pricing is the research required to get it right. Companies that attempt to skip this step and simply make guesses about their products’ value to customers are unlikely to succeed. Understanding the target market is essential, and research into what customers value must be ongoing. The good news is, this investment will pay off not only in terms of quantifying the perceived value of the product for pricing purposes but also in providing greater insights about the marketplace than can be applied to marketing, sales and customer support efforts.
• Articulate a clear and compelling value proposition. Identifying what differentiates the product or service from others in the market and determining what that difference is worth to a customer are at the heart of value-based pricing. Articulating that value proposition, however, is where the rubber meets the road. This value proposition must be relevant and understood both internally at the company itself and more broadly within the marketplace.
• Develop marketing materials and sales scripts that consistently communicate the value. One of the biggest risks of value-based pricing is failing to make the case to customers that the product or service is worth their additional investment. It’s essential to integrate the value proposition at all customer touchpoints via marketing materials and sales scripts, using branding, positioning, storytelling or testimonials to highlight the product’s unique selling points. If customers don’t see any justification for the value-based price, they won’t buy the product.
• Educate customers on the benefits and savings they receive. Savvy value-based pricing veterans will take customer persuasion efforts a step further to remind customers of the benefits of a product, even after they’ve purchased the item. They may offer customer support or other resources to ensure that customers are making full use of the product and are reaping its benefits. Value-based pricing can have negative consequences if customers are less than satisfied with their purchases in the post-sales period.
• Establish metrics that reflect the value provided to customers. It’s helpful to track the perceived value of the company’s products using metrics that can be monitored over time. These metrics will vary by product or company, but they tend to include figures related to acquisition, activation, engagement, retention and monetization.
• Regularly gather customer feedback. Qualitative input is just as, if not more, valuable in keeping value-based pricing programs on track. Customer feedback in the form of reviews, ratings, social media posts and complaints can help a company keep tabs on customer satisfaction and loyalty in the context of value-based pricing.
• Stay flexible with pricing. Value-based pricing is an ongoing process and is likely to require adjustments over time. It’s crucial to monitor and optimize value-based prices at regularly scheduled intervals. There should be mechanisms in place whereby the company can adjust prices — or value drivers or communication strategies — in response to findings from metrics and customer feedback tracking, changes in the marketplace or moves made by competitors.
• Align departments around the value-based pricing strategy. It’s obvious that marketing and sales must be an integral part of the value-based pricing implementation, but these are not the only functions within the organization that need to be on board. Indeed, the success of a value-based pricing strategy must be incorporated into overall organizational goals, so every function, from finance and operations to product development and distribution, knows its role in furthering the value-based strategy.
• Leverage technology to analyze data on customer behavior and value perceptions. Because so many inputs are required to determine an effective value-based price, technology can play a critical role. Using the right tools to analyze large volumes of customer behavioral and value perception data can unlock valuable insights to drive customer segmentation, pricing decisions and marketing strategies.

Value-Based Pricing Examples

A value-based pricing strategy can be applied to all sorts of products and services, from everyday consumer items, like bottled water and diapers, to more substantial purchases, like cars and homes. It’s helpful to look at the process through the lens of products at different ends of the cost spectrum.

A company that makes performance running shoes may opt to develop a value-based price for its latest model of super lightweight sneakers that weighs 4 grams less than its competitor’s lightest shoe. The company identifies its target market segment: runners who understand that the use of lighter footwear will optimize their running performance, a list that includes professional athletes, competitive runners, fitness professionals and amateurs who are serious about improving their performance. The competitor’s heavier model is selling for $160.

Estimating that the performance differential of the ultra-lightweight running shoe could be worth as much as $40 more, based on customer surveys, the company performs some testing of different pricing options. It finds that a price of $190 ($30 more) performs best and launches the new sneaker with that value-added price, while continuing to gather data on marketing and sales performance and customer response to evaluate the impact of the price point on key metrics. Of course, weight may not be the only perceived value differentiation in a running shoe. The same company may also use a value-based approach to price its customized running shoes or a limited-edition, vintage-inspired pair of basketball shoes coveted by sneakerheads.

Similarly, in a much higher spending range, a luxury car manufacturer may base its value proposition on any number of factors. Buyers may seek out a high-end vehicle as a status symbol, a self-esteem boost or to experience the feeling of exclusivity. Others may be car enthusiasts with a penchant for high-performance racing vehicles. Sometimes, the car provides a better customer experience or better safety features. In other cases, a luxury car maker may have invested in its brand’s perceived value, offering models that are functionally similar to lower-priced models but with added details and brand positioning that it can use to elevate the car’s value-based price. Rolls-Royce, for example, has maintained a reputation for engineering excellence and quiet motors over its more than 100-year history, which has earned it the right to charge more than $200,000 for its vehicles.

It’s worth remembering, though, that just because the shoe or automobile manufacturer has calculated a differentiated worth at $30, or even tens of thousands of dollars, doesn’t mean that customers will pay it. On average, companies realized only 48% of their price increases in 2023 (across all pricing strategies), after deducting discounts, rebates and promotional strategies, according to Simon Kucher’s “State of Pricing 2024” report. That’s why the implementation procedures and best practices of value-based pricing are so important. Even then, it’s an ongoing process. If the price doesn’t yield the intended sales, a period of discounting, negotiating or readjusting the value-based price may ensue.

Manage Your Pricing Data and Financials in One Place: NetSuite

The successful implementation of value-based pricing requires a great deal of data analysis and financial planning. Because calculating the appropriate value-based price is not as straightforward as it would be when using other pricing methods, having the right technology in place to support the process is essential.

An enterprise software platform that integrates core financial, customer and operations data can provide a solid foundation for a company to assess the costs associated with a product or service, as well as to calculate the differentiated worth of an offering to the end customer. NetSuite Financial Management, a cloud-based platform, delivers visibility into a company’s financial performance by tracking individual transactions, streamlining planning and budgeting, and integrating with other business applications, like order management, customer relationship management (CRM) and commerce, which a company may use to manage value-based pricing. NetSuite’s Pricing Management module also allows companies to define, maintain, manage and update their pricing strategies regularly to maximize profits.

To benefit from value-based pricing, when determining prices companies rely on how much their target customers believe their products and services are worth. A value-based pricing strategy is particularly appropriate for products that are highly differentiated from competitors’ offerings, as well as for luxury items and products that offer a significant return on investment. Businesses that want to reap the full benefits of creating products or services that customers perceive as valuable often see significant returns from their investment in the market research, customer segmentation, value proposition development, marketing and internal integration required to effectively implement value-based pricing. What’s more, businesses can see additional benefits in the form of greater understanding of their customers and competitors, which can further fuel the companies’ improved performance over time. Enterprise systems that bring together critical financial, operational and customer data offer the ability to successfully determine and refine value-based pricing as consumer demand ebbs and flows and market conditions fluctuate.

Value-Based Pricing FAQs

What is an example of perceived value pricing?

Perceived value pricing, often called value-based pricing, can be used by a variety of companies to set prices for an array of products, from bottled water to private jet service. One example of value-based pricing is celebrity-branded merchandise. A public figure may create their own brand of perfume or line of spirits, which may cost no more to produce than other fragrances or liquor, but the celebrity can charge a premium after identifying a segment of consumers that values the celebrity endorsement of the product. Other types of products and services that often apply value-based pricing include highly differentiated offerings, niche products and solutions, purchases with a clear return on investment, luxury goods and customized solutions.

What is the market value pricing?

Market-value pricing is a method for assigning prices to products and services by determining what the market is willing to pay for a certain type of item. This is typically calculated by looking at what customers are paying for similar items and pricing products and services to align with current market conditions.

What is value-based pricing SaaS?

When a company takes a value-based approach to pricing, it puts a dollar amount on the differentiated worth of its offering to customers, rather than applying a standard markup on its production costs, for example, or basing its prices on those of its primary competitors or tying pricing to shifts in demand. Value-based pricing can be applied in various industries to put a price on a wide range of products and services. For those in the software-as-a-service industry, which is typically subscription-based, value-based pricing is a way to improve profit margins, assuming that the SaaS company can justify a higher subscription price based on the perceived value of its product to customers. SaaS companies that are able to successfully implement value-based pricing can see additional benefits in terms of greater customer understanding, improved customer loyalty and more customer-focused feature development.