Value-Based Pricing

Article byVikram Shakti
Reviewed byDheeraj Vaidya, CFA, FRM

Value-Based Pricing Definition

Value-based pricing is a pricing strategy in which the product’s price is based on perceived value delivered to the customer instead of the actual cost of the product or service. This type of pricing is most commonly used by niche industries and those that provide customer-oriented customized products.

Key Takeaways

  • Value-based pricing refers to the pricing strategy where the product’s price fixes on the perceived value delivered to the customer rather than the product or service’s actual cost. 
  • The value-based pricing is used mainly by niche industries and those who offer customer-oriented customized products. 
  • The value-based pricing is of two types: reasonable and value-added.
  • The profit margin in the value-based pricing is high, but the number of products is less than the cost-based pricing with a lesser profit margin. Therefore, it is a pricing strategy to target the niche market.


The price of a product/service is fixed based on the estimated value of a product or the value to the customers but not exclusively from these criteria. For example, the same cuisine is priced differently in different restaurants. The typical restaurant will charge a nominal price, whereas the same dish is priced higher at a premium in a 5-star hotel. Even though the food is the same and irrelevant to the taste, the customer would be ready to pay that premium amount to get the attached benefits like enjoying the hotel ambiance.

A painting may cost a lot more than just the cost of raw materialsRaw MaterialsRaw materials refer to unfinished substances or unrefined natural resources used to manufacture finished more involved. Likewise, an art piece may be valued more than just the cost of the production. In other words, pricing a product shows how much the customers see its value. For example, designer apparel is priced at a premium compared to the same garment available on Amazon or Walmart by a local seller.


You are free to use this image o your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Value-Based Pricing (

Now you can Master Financial Modeling with Wallstreetmojo’s premium courses at special prices

Best Financial Modeling Courses by Wallstreetmojo

Financial Modeling Course
* McDonalds Step by Step Modeling from Scratch
* 12+ Hours of Video
* Certificate
Rating 4.91/5
Financial Modeling & Valuation
* McDonalds Step by Step Modeling from Scratch
* Valuations
* 25+ Hours of Video
* Certificate of Completion
Rating 5/5
Valuation Course
* Valuations (DCF, DDM, Comparable Comps)
* 12+ Hours of Video
* Certificate
Rating 4.89/5

Types of Value-Based Pricing

There are two types. Each one is mentioned along with an explanation below:

You are free to use this image o your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Value-Based Pricing (

#1 – Good Value Pricing

In this type of pricing, the product is priced as per the quality of the product and service provided to the customers concerning the product. Therefore, the pricing depends mainly on the quality and service associated with the product.

#2 – Value-Added Pricing

In this type of pricing, the product/service is priced as per the value-added products for the customer to use. From the customer’s perspective, how much ever the value of a particular feature in the product is worth is studied, and accordingly, the price is decided for the whole creation.


  • The products priced under this strategy are always customer focussed. Any improvements, changes, versions, and product variations are made only after consulting the customer and according to their needs.
  • Companies manufacturing such products should have a niche market for products. In addition, such products should be associated with a service that differentiates them from the other players providing similar products.
  • There should be a strong communication channel to collect effective customer feedback as customer perception is the main driving force in deciding the price of the product/service.
  • Firms willing to price products using such a strategy must spend a significant amount of time understanding their customers’ needs. Only then will satisfied customers justify the price of the products.

How to Calculate Value-Based Pricing?

Example #1

Consider a brand, ABC fashion designers who are into men’s fashion. Suppose they are launching new trousers and the pricing needs to be made as per value-based. Brand ABC, a premium fashion retailer, has to price the product appropriately to target the correct audience. It will consider another premium fashion retailer, brand XYZ, to compare similar trousers’ prices.

Suppose the brand XYZ has priced at $125, then brand ABC is a similar brand and launching a similar product, the price should also be around $125. Depending on the value addition happening in the new product to be established, ABC decided to launch the product at $130.

Example #2

Another example of a software company, Value Tech, providing an exclusive software service to client Romez using value-based pricing is explained in the attached excel. The calculation to arrive at a price is also offered in the same.

Value Based Pricing Example

The actual cost to the company is $5,25,000, whereas the total billed amount is $6,00,000. thus, there is no relation between incurred and actual price.


  1. The product should be focused on a particular segment and not deviate from the main and only element. Customer perceived value is estimated in this step.
  2. The price of the nearest competitor’s products in the same segment is taken to decide the range of fixed costs. Then, based on feedback from customers, the price range of the product is determined.
  3. To see the product’s value from a customer’s perspective and point out differentiated features in the product to be priced. To check how much the customer values the output.
  4. Decide a price for this differentiated product feature and price the product collectively by adding a competitor’s price and extra feature price.

Difference Between Value-Based and Cost-Based Pricing


  • Increased profits for the manufacturer.
  • Customer loyalty is higher in these types of pricing.
  • Customization of products is possible.
  • Better quality of product and service.
  • Better understanding and rapport between customer and manufacturer.



Value-based pricing is a pricing strategy to target a niche market. The product has to be customer-oriented and customizable according to the customer’s needs. Undoubtedly, the quality of the product and service associated with the product should be of high quality, but the product’s price will also be very high. There will be a better understanding between customer and manufacturer. The profits for the manufacturer are also very high, but it is not easy to scale up the production as the target will be niche.

Frequently Asked Questions (FAQs)

Which companies use value-based pricing?

Many industries, including technology, healthcare, automotive, and consumer goods companies, use this pricing method.

Is value-based pricing ethical?

Value-based pricing is considered an ethical strategy, as it aligns the price of a product or service with its value to the customer. Moreover, this pricing strategy indicates more fair and transparency than other pricing strategies. However, it is essential to note that the ethicality of value-based pricing ultimately depends on how the value is determined and communicated to the consumer.

What is the difference between value-based pricing vs competition-based pricing?

The value-based pricing is an approach to fixing the product or service price based on the customer’s perceived value. In comparison, competition-based pricing is a method by which prices differ per the competitors’ price variations.

Why is value-based pricing better?

The value-based pricing is better because it ensures that the customers are happy while paying the price for the value they will receive. In addition, the pricing as per the value the customer examines the product safeguards the companies from changes in the short period while making the better customer experience with their signed anticipation.

Recommended Articles

This article is a guide to Value-Based Pricing. We discuss the value-based pricing definition, types, calculations, advantages, disadvantages, and examples. Also, you can learn more about it from the following articles: –