Value-based pricing
Value-based pricing sets a price from the value customers place on a product rather than from its production cost. It is contrasted with cost-plus pricing, where cost is the starting point rather than just a floor beneath the price.
See it move
A software provider's closest competitor charges €200 a month, and its own product saves the customer €150 a month in reduced downtime, so the economic value to the customer is €200 plus €150, or €350. The provider prices at €280, well above its own €40 cost but still €70 cheaper than the full value delivered, giving the customer a clear reason to switch.
The formula
Variables
- Economic value to the customer (€)
- Price of the next-best alternative (€)
- Net differentiation value versus the alternative (€)
Gives the ceiling price a rational customer would pay, anchored to what they would pay for the next-best alternative.
Check yourself
A consulting firm's client currently handles a task in-house for €50,000 a year. The firm's service would save the client an extra €15,000 a year in efficiency gains, but the client would need to spend €3,000 a year integrating the new service with its systems. What is the economic value to the customer, the ceiling price that reflects the full value of switching?