What is 'Value-Based Pricing'

Value-based pricing is the setting of a product or service's price based on the benefits it provides to consumers. By contrast, cost-plus pricing is based on the amount of money it takes to produce the product.

Companies that offer unique or highly valuable features or services are better positioned to take advantage of value-based pricing than companies with products or services that are relatively indistinguishable from those of their competitors.

BREAKING DOWN 'Value-Based Pricing'

A company that sells basic white cotton athletic socks would probably use cost-plus pricing, because its product does not have any special features. However, a company that sold sweat-wicking, extra-padded athletic socks could use value-based pricing and sell its socks at a higher price, because it provides something unique and valuable to athletic consumers.

Value-based pricing is not based on solid metrics, such as material and labor costs, which can are easy to calculate. Instead, valued-based pricing relies on the consumers' perception of the value. Since its basis is not concrete, value-based pricing can be affected by things such as current fashion trends or the general feeling surrounding an item or idea.

While a cost-plus pricing model focuses on recouping costs as the primary pricing guideline, value-based pricing tries to find a price point that is as high as possible without causing too many potential customers to turn away due to the price.

Understanding Perceived Value

In the case of value-based pricing, value is not determined by simply adding up the costs of the materials and labor involved in production, along with any associated costs such as marketing and distribution. While those costs are a factor, the driving force behind the price is how highly the item is desired by the customer, an intrinsic factor that is not easy to measure numerically.

Examples of Value-Based Markets

The fashion industry is an example of a sector where value-based pricing is common. If a particular designer becomes popular, the designer can charge more for the goods they create than if they were not as popular. This same principle can apply to other markets where the idea of the consumer’s outward image may be affected by possessing the item in question. Other industries subject to value-based pricing include the automotive industry, name-brand pharmaceuticals, cosmetics and personal care.

Not all items within the category use value-based pricing. For example, generic medications may use a cost-plus model while a name-brand medication uses the value-based model.

  1. Variable Cost-Plus Pricing

    Variable cost-plus pricing is a pricing method in which the selling ...
  2. Target Return

    Target return is a pricing model that takes into account the ...
  3. Cost-Plus Contract

    An agreement to pay a company for a job based on the amount of ...
  4. Cost Accounting

    Cost accounting is an accounting method that aims to capture ...
  5. Competitive Pricing

    Setting the price of a product or service based on what the competition ...
  6. Current Price

    Current price is the "real time" price of a security trading ...
Related Articles
  1. Tech

    Competition Fuels Aetna, Merck Deal (AET, MRK)

    In an effort to boost sales of its diabetes drugs, Merck inks value-based contract to ensure preferred status with insurance giant.
  2. Managing Wealth

    The 3 Best Performing Asset Classes in the Last 20 Years

    Find out which three asset classes have been the best performers over the last 20 years, and why looking at just nominal returns is not always a good idea.
  3. Investing

    3 Ways Price Momentum Can Burn Your Portfolio

    Momentum traders are always trying to ride the herd. In these three situations, however, they may end up getting trampled.
  4. Managing Wealth

    Financial Planning for Professional Athletes: An Inside Look

    The right financial planning for professional athletes can turn short-term high earnings into a lifetime of steady income. Here's how it's done.
  5. Insurance

    Investing In Medical Equipment Companies

    Learn the basics about medical equipment companies and how investing in them can benefit growth and value investors alike.
  6. Insurance

    Big Pharma: Will Price Pressure Happen No Matter What?

    Watch out for a possible decline in pharmaceutical stock prices, thanks to a renewed debate about the role of government policy and macroeconomic headwinds.
  7. Trading

    Pullback Buying Opportunity in These ETFs

    The uptrend in the U.S. stock market remains strong, and the recent pullback provides an opportunity to buy to index ETFs.
  8. Investing

    Top Equity ETF with German Exposure (EWG)

    EWG is the major US-traded ETF with exposure to German stocks. We’re having a look at EWG’s past and recent total returns.
  9. Investing

    Dollar General Buying Dollar Express Chain

    At a time when many retailers have been closing stores, Dollar General (NYSE: DG) has been adding them at a furious pace. The discount chain plans to open 1,000 new locations in 2017, after ...
  10. Insights

    The Consumer Price Index

    Find out how this economic measure can help you make key financial decisions.
  1. What is the difference between cost and price?

    Consider how cost affects a product's price. Corporate expenses and the current cost of living both impact the final sticker ... Read Answer >>
  2. What's the difference between the substitution effect and price effect?

    Learn how the increase in an item's price affects consumer demand. Explore the differences between the substitution and price ... Read Answer >>
  3. What is the prime cost formula?

    Learn about the prime cost formula and how to determine which costs are included in this calculation, including the difference ... Read Answer >>
  4. What is the difference between transfer price and standard cost?

    Learn about the difference between transfer pricing and standard cost and how companies decide what to charge for products ... Read Answer >>
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center