What is value-based pricing? Strategy, benefits, and implementation

Nearly half of business owners want to increase revenue in 2025, and a smarter pricing strategy is one of the most efficient paths to that goal. Many factors go into setting a price, like total production cost, markup percentage, and competitive pricing. 

When pricing a product or service, the most recommended strategy is to consider a product’s perceived value. Value-based pricing is underpinned by the idea that a product is only worth what customers are willing to pay.

By knowing how potential customers value your product, you can set a price that is more likely to generate sales.

How value-based pricing works

Value-based pricing is a product’s price based on how much customers think it’s worth. Instead of using internal factors, like cost and markup, or other competitors, value-based pricing focuses solely on customers.

This requires significant market research, as value-based pricing looks at the customer’s perceived value of the product, its total addressable market demand, and even the brand’s reputation in the market. 

In the SaaS industry, for example, "value" is often determined by use. The cost of the product to build doesn't change, but the user is charged based on the value they receive from the platform, measured in terms of the features they take advantage of. 

Thanks to all this collected data, value-based pricing additionally aids a company in staying ahead of the competition. 

Value-based pricing vs. cost-plus pricing

Value-based pricing and cost-plus pricing sit at opposite ends of the spectrum. 

Value-based pricing starts with in-depth research and awareness of the company’s target market. It necessitates an understanding of customers, their pain points and needs, and the value they place on meeting those needs. With so many factors, value-based pricing is not as straightforward as cost-plus pricing. 

Cost-plus pricing is set by calculating all the expenses incurred to make the product, and then adding a markup percentage. The typical costs include raw materials, packaging, labor, and overhead. 

In this way, a cost-plus pricing strategy keeps things simple and easy to justify. It also helps a company cover its production costs if the product sells. 

Understanding the value stick framework

The value stick is a simple conceptual model that helps businesses visualize how value is created in a transaction. It outlines the points determining profitability and provides a framework for pricing decisions.

Willingness to pay (WTP)

Willingness to pay (WTP) represents the maximum price a customer will pay to obtain a particular product or service. This ceiling is inherently subjective and varies based on individual customer segments and the specific context of the purchase.

Several factors influence a customer's WTP, including:

• Perceived benefits and features of the offering
• Availability and perceived quality of substitute products or services
• Urgency of the customer's need or problem
• The customer's budget and financial capacity
• The reputation and perceived trustworthiness of the brand

For example, someone caught in the rain might be willing to pay a significantly higher price for an umbrella from a street vendor than on a sunny day when there's no immediate need.

Price

Price is the actual monetary amount a firm charges a customer for its product or service. For a transaction to occur, the price must fall below the customer's willingness to pay (WTP). 

At the same time, to ensure profitability, companies must set the price above the cost of producing the product. The difference between the price and the cost represents your potential profit margin, before accounting for operational overheads.

Cost

Cost is the total expenditure incurred in creating and delivering your product or service. This includes the cost of raw materials, direct labor involved in production, and overhead expenses. 

The cost of goods or services is the lowest you can go when setting your price long-term. Consistently pricing below the total cost is not a viable strategy for long-term business operations. Still, you can go lower for short periods for strategic reasons (like increasing your customer base). 

Willingness to sell (WTS)

Willingness to sell (WTS) is the minimum compensation a supplier will accept in exchange for contributing to your product or service. 

A business's suppliers' WTS directly influences its overall cost structure. The difference between cost and the supplier's WTS represents the supplier's profit margin on the resources they provide.

Customer delight, firm margin, and supplier surplus

The gaps within the value stick—between WTP, Price, Cost, and WTS—represent different forms of value captured by the parties involved in the transaction. Specifically:

• Customer delight (or consumer surplus) is the difference between the customer's Willingness to Pay (WTP) and the actual Price they paid (WTP - Price). It represents the extra value the customer perceives they received beyond the monetary cost.
• Firm margin is the difference between the Price charged to the customer and the Cost incurred by the firm (Price - Cost). It signifies the value captured by the company as profit (before broader overhead).
• Supplier surplus is the difference between the firm's Cost for the input and the supplier's Willingness to Sell (Cost - WTS). It represents the value captured by the suppliers of the necessary resources.

5 steps to building your value-based pricing strategy

Here are four steps companies can use to implement a value-based pricing strategy:

1. Define your total addressable market 

Most products, highly niche ones, cater to multiple customer segments. Value-based pricing starts by defining these segments early on, so a company has a clear idea of the potential markets and different buyer personas it aims to reach. 

2. Research your customer segments

Once these customer segments are clear, the next step is to understand each one’s needs, motivations, and what they find valuable. 

Whether this means asking existing customers or researching potential buyers, every segment will have a different perception of value and what they’re willing to pay. This comprehensive insight is essential to know what price a company should set for its product. 

3. Do a competitive analysis

The perceived value of a product is tightly tied to the value of similar products in the market. If a product can be easily replaced by an alternative that serves a similar function, this can lower its value. Analyzing competitors helps a company better determine its value from a customer’s point of view. 

While the competition’s price shouldn’t directly influence how a company prices products using this pricing method, it does help show how to target customers who value similar products. 

4. Set prices and frequently test

After all this research, a company should be able to consolidate its insights and arrive at the best possible value-based price for its product. Publish the product price and then observe new customer feedback. If sales aren’t as expected, a company can do more research to figure out another price or revisit its strategy. 

5. Monitor, evaluate, and adapt

Value-based pricing requires ongoing attention. Continuously collect customer feedback specifically related to their perception of your pricing in relation to the value received. As market trends change and competitors adapt their products, you may need to revisit your pricing. 

Customer feedback is the best metric for knowing when to adjust your prices. Do your customers now feel that a competitor offers a better deal? It may be time to rethink your pricing. 

Benefits of value-based pricing

Value-based pricing is a highly regarded pricing strategy that presents many business benefits.

Better product-market fit

Value-based pricing aims to increase a product’s perceived value, which entails adding and improving features to meet the target customer’s needs. 

This constant innovation not only helps a company achieve product-market fit, but it also results in a better quality offering that’s highly differentiated in the market. 

Potential for larger profit margins 

Unlike sticking with a fixed markup percentage or following a competitor’s price, value-based strategies give companies the freedom to price products as high as customers are willing to pay. This is especially beneficial if the product is seen as a luxury or high-value item.

Moreover, with a value-based pricing approach, a company can stand to earn even more by adding to the value of its products. 

Increased customer understanding and loyalty 

As a result of the dedicated effort to understand its customers, companies that use value-based pricing may also see an increase in overall customer satisfaction and loyalty. Because this pricing strategy is unique in its priority to provide the most value, it inevitably leads to products and services more likely to result in customer loyalty. 

Challenges of using value-based pricing

As with every pricing strategy, value-based pricing comes with its share of challenges. Here are some things to keep in mind when planning to set your product price based on value:

Difficulty in determining prices 

A product’s value hinges on customer perception, which is difficult to nail down without proper research and active engagement with customers. Even with the right resources, value-based pricing isn’t an exact formula and needs to be tested in the market. The ideal price isn’t always calculated on the first try and can take some trial and error. 

Intuit Enterprise Suite, which offers customizable and automated pricing rules, can help smooth the pricing process.

Profits aren’t always guaranteed 

Companies with a lot of competition and little differentiation may not always see enough profit with a value-based pricing method. In these instances, customers generally don’t place a high value on products because of their ready availability. This drives down prices and makes it challenging to generate enough profit to sustain a business. 

Requires continued dedication 

A major challenge with value-based pricing is that values are constantly changing. Unlike cost-plus pricing, which uses a fixed percentage, pricing by value is less formulaic. What’s considered valuable or not valuable is heavily dependent on cultural trends, the economy, and other external factors. Value-based pricing is a continuous process that’s prone to fluctuations and requires dedication to arrive at the right price.

When to use value-based pricing?

As indicated by the benefits and challenges above, there are companies more suited for value-based pricing. Here are some clear signs a business should price its products according to value. 

There are adequate resources to optimize pricing

Value-based pricing only works if a company has the time to research and analyze customer data. Not only should there be systems in place for setting prices, but value-based pricing needs to be revisited regularly and requires more resources than any other type of pricing strategy.

The products are considered unique or high-quality 

Specialty companies offer value much greater than the actual cost. This includes ones that have built a notable brand, focus on a specific niche, or create any product that isn’t easily accessible to mass markets. Companies in these cases are primed to use value-based pricing as it better represents their products.

Examples of value-based pricing

With the increasing importance placed on product value, many products exhibit this pricing strategy. Below are two examples of companies that benefit from value-based pricing: 

Apple’s iPhone is the perfect example of a company that priced its product according to its perceived value. For example, while its cost to manufacture an iPhone 7 was reported at $224.80, the item started retailing at $649 at the time of release in 2020. 

This 188.7% markup is far from a standard cost-plus strategy percentage. However, it’s a bar Apple helped set, thanks to its premium design, ease of use, and remarkable customer experience.

Rapha Cycling Clothing is a favorite brand of cyclists. Thanks to its earned trust and its niche market, it can sell its bib shorts anywhere from $200-400. Other brands that offer the same product type offer it for less than half price. 

But because of the high worth placed on Rapha, thanks to its niche market positioning and devout customer base, the brand has been able to grow the company while selling at a higher price point. 

How Intuit Enterprise Suite supports your value-based pricing strategy 

Implementing a successful value-based pricing strategy requires more than understanding your customers; it demands robust tools to manage the intricate data and in-depth analysis necessary to achieve it. Intuit Enterprise Suite offers a powerful system with features designed precisely for this purpose. 

Let's unpack a few of them: 

Gain deep customer and profitability insights 

A core tenet of value-based pricing is understanding where your value truly resonates—and how that translates into profitability. You need to pinpoint which customers and offerings contribute most to your bottom line. 

Intuit Enterprise Suite provides advanced, customizable reporting capabilities that go far beyond standard financial statements, allowing you to filter, sort, and tailor reports to dissect profitability from numerous perspectives.

Some of the most critical customer insights you'll need include: 

• Profitability breakdowns by customer, type, job, product, service line, and geographic region
• Identification of your most and least profitable customer segments.
• Analysis of sales trends to reveal which offerings command stronger prices or margins
• Understanding the revenue and profit generated by the different value propositions you offer

Understand true costs and value

Accurate cost data helps establish your price floor and allows you to calculate your margin (Price - Cost, if you refer back to our value stick diagram above) for each transaction. 

Intuit Enterprise Suite's job costing features enable businesses, particularly those project or service-based, to meticulously track all expenses tied to specific jobs or deliverables.

Cost elements you can track include:

• Direct material costs
• Actual labor hours and associated payroll expenses
• Fees paid to subcontractors
• Applied overhead based on your defined allocation methods
• Other expenses linked to specific jobs

With transparent data around these actual costs, you ensure that the value-based prices you set align with customer willingness to pay and guarantee profitability for your business.

Segment your customers effectively 

Recognizing that customer segments perceive value differently and possess varying willingness to pay (WTP) is central to VBP. Intuit Enterprise Suite facilitates multi-dimensional tracking through features like class tracking and customizable fields. This allows you to categorize transactions according to relevant criteria and segment reporting.

Examples of valuable segments include:

• The specific industry or vertical your customer operates in
• The size of the customer's organization (like SMB vs. enterprise)
• The particular bundle of products or services the customer purchases
• The customer's geographic location or sales territory
• Key value drivers for the customer
• The channel through which the customer was acquired

Implement flexible, value-driven prices 

Value-based pricing rarely involves a one-size-fits-all approach; it often necessitates implementing pricing tiers, customer-specific rates, or feature-based pricing models. 

Intuit Enterprise Suite offers advanced pricing solutions that empower you to establish sophisticated pricing rules—some of which can even be automated. 

Examples of pricing rules that support VBP implementation:

• Distinct pricing tiers tailored to different customer types, classes, or even individual customers
• Volume-based discounts that align with larger purchases increase the value for the customer
• Price adjustments based on specific product or service combinations, reflecting the added value of bundles
• Defined start and end dates for promotional pricing tied to specific value-driven offers
• Rules to override standard pricing based on particular job types or contractual agreements

Track key performance indicators (KPIs)

Adapting your pricing strategy as markets change is critical for VBP success. KPIs provide crucial insights into whether your pricing effectively captures value, maintains profitability, and resonates with customers (indicated by retention and satisfaction). 

Intuit Enterprise Suite captures sales figures, cost data, customer information, and more—all of which can help track essential KPIs directly through customizable reports.

Relevant KPIs for evaluating your pricing strategy include:

• Gross Profit Margin analyzed by customer segment, product line, and individual customer
• Customer Lifetime Value (CLV) with comparison between high-value and low-value segments
• Average Revenue Per Customer (ARPC) broken down by segment
• Customer Retention and Churn Rate are indirect indicators of customer satisfaction and perceived value
• Trends in sales volume and revenue following the implementation of new pricing structures

Scale your strategy across multiple entities and complex operations

For larger businesses or those with multiple locations, divisions, or legal entities, a consistent and well-monitored VBP strategy is essential. Intuit Enterprise Suite is designed to handle the complexities and scale associated with such operations.

Tools you'll need for a business of that scale: 

• The ability to manage financial data for multiple company files or utilize consolidation tools for a unified view
• A robust database infrastructure capable of efficiently processing large volumes of transactions
• Support for more concurrent users compared to more basic accounting software
• Features enable standardizing reporting and pricing rules across different operational units
• Advanced inventory management capabilities

Boost productivity and enhance profitability

A value-based business strategy bases product price on the customer’s willingness to pay a certain value for a product or service. While the method hinges on continuous research and dedicated resources, products priced according to a customer’s value are some of the most successful. 

Even the most complex pricing strategy can be easily streamlined with Intuit Enterprise Suite, which enables flexible pricing levels and automatic rules that make sure you’re earning on every transaction.