Value-Based Pricing: How to Price Based on Customer Value
The best pricing isn't based on your costs or competitors—it's based on the value you create for customers. Value-based pricing captures a fair share of that value while leaving customers better off.
What is Value-Based Pricing?
Value-based pricing sets price according to the value your product delivers to customers, not based on your costs or what competitors charge. It's the foundation of effective startup pricing strategy. A fractional CFO can help you quantify customer value and model pricing scenarios.
Pricing Approaches Compared
| Approach | Basis | Problem |
|---|---|---|
| Cost-plus | Your costs + margin | Ignores customer perspective |
| Competitor-based | Competitor prices | Assumes competitors are right |
| Value-based | Customer value received | Requires deep customer understanding |
The Value-Based Formula
Value to Customer - Your Price = Customer Surplus
Customers buy when customer surplus is positive. Your goal: maximize your price while keeping customer surplus attractive relative to alternatives.
The 10x Rule
For B2B software, a common rule: your price should be ~10% of the value you deliver. If you save customers $100K/year, price around $10K. This leaves compelling customer surplus while capturing fair value.
Understanding Customer Value
Value takes many forms. Understanding how customers perceive and measure value is essential for pricing.
Types of Value
Economic Value
Revenue increased, costs reduced, time saved. Can be quantified in dollars. Easiest to price against.
Risk Reduction
Reduced exposure to compliance issues, security breaches, or operational failures. Harder to quantify but very real.
Strategic Value
Enables new capabilities, competitive advantage, or market entry. Long-term and transformational.
Emotional Value
Reduced stress, increased confidence, better experience. Important for decision-makers personally.
Research Methods
- Customer interviews: How do customers describe value? What alternatives do they consider?
- Win/loss analysis: Why did customers buy or not buy? Was price a factor?
- Usage data: How do customers actually use your product? What correlates with retention?
- ROI case studies: Quantify actual results customers have achieved.
Quantifying Value
To price on value, you need to quantify it. This requires understanding customer economics and what changes because of your product.
Value Quantification Framework
1. Revenue Impact
How much additional revenue does your product enable?
Example: "Customers see 15% increase in conversion rate → $X in additional revenue"
2. Cost Reduction
What costs does your product eliminate or reduce?
Example: "Saves 20 hours/month of manual work → $X in labor costs"
3. Risk Avoidance
What costly risks does your product prevent?
Example: "Prevents compliance violations averaging $X in fines"
4. Time to Value
How much faster do customers achieve outcomes?
Example: "Implementation in 2 weeks vs. 3 months → faster ROI"
Example: Value Calculation
Product: Sales automation tool
Customer: 10-person sales team
Value delivered:
- 5 hours/week saved per rep × 10 reps = 50 hours/week
- × $50/hour fully loaded cost = $2,500/week
- × 52 weeks = $130,000/year in time savings
Value-based price range: $10,000-15,000/year (10% of value)
Implementation
Implementing Value-Based Pricing
Common Challenges
- Value varies by customer: Create segments or custom enterprise pricing
- Value is hard to prove: Build ROI calculators and case studies
- Competitors are cheaper: Compete on value delivered, not price. Consider moving upmarket where value matters more than price.
- Sales team struggles: Train on value selling, not just product features
Value Communication
Value-based pricing only works if customers understand the value. Invest in ROI calculators, case studies, and sales training. The product that communicates value best often wins, not the product that delivers value best.
Need Help With Value-Based Pricing?
Eagle Rock CFO helps companies understand customer value and price accordingly.
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