Value-Based Pricing Methods

Capturing the Value You Create

Value-based pricing sets prices according to the value customers receive, not the costs you incur or the prices competitors charge. This approach can capture far more value than cost-based or competitive methods when your product delivers significant customer benefits.

The core principle: price should reflect a share of the value you create for customers. If your product saves a customer $100,000 annually, a price of $50,000 captures half the value—still delivering $50,000 in net benefit to the customer while generating $50,000 in revenue for you.

Value-based pricing requires deep understanding of how customers use your product and the outcomes it enables. It works best for differentiated products with quantifiable benefits, B2B contexts where economic value can be calculated, and products where customers make rational economic decisions.

Method 1: Economic Value Estimation (EVE)

Economic Value Estimation calculates the objective, quantifiable value a customer receives from your offering compared to alternatives. The formula is:

Economic Value = Reference Value + Differentiation Value

Reference Value is the price of the next best alternative—what the customer would pay if your product didn't exist. Differentiation Value is the additional value your product provides beyond that alternative, which can be positive (your product delivers more) or negative (your product delivers less in some dimension).

Calculating Reference Value

Identify the customer's next best alternative. What would they buy if your product didn't exist? The price of that alternative establishes your reference value—the starting point from which differentiation value adjusts.

Calculating Differentiation Value

Identify and quantify every way your product differs from the reference alternative. Be comprehensive—consider cost savings (labor, materials, energy, maintenance), revenue enhancement (enables higher prices, more sales, new markets), risk reduction (lower failure rates, better compliance, less downtime), time savings (faster processes, quicker implementation), and quality improvements (better outcomes, fewer defects, higher satisfaction).

For each differentiation element, estimate the dollar value over the relevant time horizon. Sum positive differentiation, subtract negative differentiation, and add to reference value.

🔢 Economic Value Estimation: Industrial Equipment Example

You're selling an advanced pump system to replace a standard pump.

REFERENCE VALUE

Standard pump price: $10,000

POSITIVE DIFFERENTIATION

Energy savings: $2,000/year × 5-year life = $10,000

Maintenance reduction: $500/year × 5 years = $2,500

Downtime reduction: $3,000 (fewer failures)

Total positive differentiation: $15,500

NEGATIVE DIFFERENTIATION

Training required: -$1,500

Total negative differentiation: -$1,500

TOTAL ECONOMIC VALUE

$10,000 + $15,500 - $1,500 = $24,000

PRICING IMPLICATION

Your pump creates $24,000 in economic value. Pricing at $18,000 captures $8,000 of the differentiation value while leaving $6,000 for the customer—a compelling value proposition.

Value Sharing: How Much to Capture

You shouldn't capture 100% of the value you create. If customers pay your full economic value, they receive zero benefit from choosing you over the alternative—they're indifferent. Leave enough value with customers to make your offering compelling.

How much to capture depends on several factors

• Competitive intensity: More competitors offering similar value means you capture less.
• Customer power: Large, sophisticated buyers extract more of the value for themselves.
• Switching costs: Higher switching costs allow you to capture more value.
• Alternative availability: Fewer alternatives means more capture potential.
• Risk perception: If customers doubt you'll deliver the promised value, they discount it. Common value capture ratios range from 30-70% of differentiation value, with 50% being a reasonable starting point. The exact ratio requires judgment based on market context.

Method 2: Perceived Value Pricing

Economic Value Estimation works for quantifiable B2B benefits, but many products deliver value that's difficult to quantify: emotional benefits, convenience, status, peace of mind, risk reduction that can't be precisely measured. Perceived value pricing uses customer research to understand willingness to pay for these intangible benefits.

Van Westendorp Price Sensitivity Meter

This survey technique asks four questions: At what price would this be so cheap you'd question quality? At what price is this a bargain—a great buy? At what price is this getting expensive but you'd still consider it? At what price is this too expensive to consider?

The intersections of these response curves reveal optimal price ranges and price sensitivity patterns.

Conjoint Analysis

Conjoint analysis shows customers multiple product configurations with different features and prices, then analyzes their choices to infer the value placed on each attribute—including price. This reveals willingness to pay more reliably than direct questions.

Key Takeaways

• Value-based pricing captures a share of the value you create for customers
• Economic Value = Reference Value + Differentiation Value (positive and negative)
• Don't capture 100% of value—leave enough benefit to make your offering compelling
• For intangible benefits, use research methods like conjoint analysis to estimate perceived value