What Is Value-Based Pricing?

Value-based pricing is a methodology of setting prices primarily based on a consumer's perceived value of the product or service in question. By contrast, "cost-plus" pricing factors the costs of production into the pricing calculation. Companies that offer unique or highly valuable features or services are better positioned to take advantage of the value-based pricing model than companies which chiefly sell commoditized items.

Understanding Value-Based Pricing

The value-based pricing principle mainly applies to markets where possessing an item enhances a customer's self-image or facilitates unparalleled life experiences. To that end, this perceived value reflects the worth of an item that consumers are willing to assign to it, and consequently directly affects the price the consumer ultimately pays.

Although quantifying a conceptualized value is an inexact science, this can be achieved with sophisticated marketing techniques. For example, luxury automakers solicit customer feedback, that effectively quantifies customers' perceived value of their experiences driving a given car model. Consequently, sellers can use the value-based pricing approach to establish a vehicle's price, moving forward.

[Important: While the value-based pricing methodology sets prices based on a consumer's perceived value of a product or service, "cost-plus" pricing factors the costs of production into the calculation.]

Examples of Value-Based Markets

Arguably the business sector most heavily influenced by the value-based pricing methodology is the fashion industry, where this type of price determination mechanism is standard practice. After all, popular name-brand designers command higher prices based on consumers' perceptions of how the brand affects their image. And if a designer can persuade an A-list celebrity to wear his or her look to a red-carpet event, the perceived value of the associated brand can suddenly skyrocket. On the other hand, when a brand's image diminishes for any reason, the pricing strategy tends to re-conform to a cost-based pricing principle.

Other industries subject to value-based pricing models include name-brand pharmaceuticals, cosmetics, and personal care.