Value-Based Pricing
Price the Outcome, Not the Effort
Executive Summary
"The most profitable companies on earth (Apple, Salesforce, Nike) use Value-Based pricing. This guide teaches you how to quantify the 'Economic Value to the Customer' (EVC) to justify premium fees."
01.The Philosophy of Value
In 'Cost-Plus' pricing, you look inward at your expenses. In 'Competitive' pricing, you look outward at your rivals. In 'Value-Based' pricing, you look upward at the customer's world.
Value-based pricing is the practice of setting a price based on the perceived or estimated value of a product or service to the customer rather than on its cost or historical prices. It is the only strategy that aligns the incentives of the buyer and the seller. When you price for value, you are rewarded for efficiency and innovation, not just for showing up and billing hours.
02.The EVC Framework
The core of this strategy is Economic Value to the Customer (EVC). To calculate it, you must follow this formula:
EVC = Reference Price + Differentiation Value
1. Reference Price: This is the cost of the 'Next Best Alternative' (NBA). If the customer doesn't buy from you, what do they do? Do they buy from a competitor? Do they use a spreadsheet? Do they hire a junior employee? The price of that alternative is your starting line.
2. Differentiation Value: This is the net dollar value of everything that makes your product better (or worse) than the NBA. This includes time saved, risk avoided, revenue generated, or status gained.
03.Quantifying the 'Unquantifiable'
Time Savings
Calculate the hourly rate of the person using the tool multiplied by the hours saved. e.g., 5 hours/week saved for a $50/hr manager = $1,000/mo in value.
Risk Mitigation
Calculate: (Probability of Failure) x (Cost of Failure). If your security tool prevents a $1M data breach that has a 5% chance of happening, it adds $50k in value.
Revenue Generation
The easiest to sell. If your software increases conversion rates by 2%, and the client does $10M in revenue, you just created $200k in new money.
Brand Equity / Ego
The hardest to quantify, but often commands the highest premiums. Usually measured through Brand-Price Tradeoff studies (BPTO).
04.The 30% Capture Rule
Identify the NBA
Confirm with the client: 'If we weren't here, how would you solve this?' Get them to agree to the baseline cost.
Prove the Delta
Demonstrate exactly where your solution outperforms the baseline. Use data, not adjectives.
Share the Value
A common standard is to capture 10-30% of the value you create, leaving 70-90% as 'Profit' for the customer. This makes the sale a 'no-brainer'.
The Anchor Shift
If you create $100k in value, a $20k fee feels like a bargain. Without the value context, $20k feels like a cost.
05.Implementation Strategy
To implement value-based pricing, you must move away from 'Standard Price Lists'. Instead, use Price Segmentation. Different customers derive different value from the same product.
A multinational corporation might derive $1M in value from your API, while a solo developer only derives $100. Charging them both $500 is a mistake—it's too expensive for one and leaving massive surplus on the table for the other. Use Value-Metric Scaling (e.g., charging per user, per transaction, or per record) to automatically align price with value as the customer grows.
Industry Benchmarks
Average multiplier of value-based companies vs cost-plus rivals.
Target ratio of value created vs fee charged in B2B services.
The percentage of created value an agency typically captures in fees.
Expert Q&A
Q: What if there is no competitor?
The 'Next Best Alternative' is then 'Doing Nothing' or 'Human Labor'. Calculate the cost of the manual status quo. The cost of inefficiency is usually much higher than a competitor's price.
Q: How do I handle price pushback?
Pivot the conversation back to the cost of the problem. 'If we don't fix this, you will continue losing $10k/month. Our $2k fee stops that bleed immediately.'