Pricing Smarter: Value-Based vs. Competitor and Cost-Plus Strategies

When it comes to pricing strategies, one approach continues to gain traction for its ability to align pricing with customer expectations and maximise profitability

CREDIT: This is an edited version of an article that originally appeared in SBI Growth

Unlike traditional models that rely on production costs or competitor benchmarks, value-based pricing sets a product’s price according to how much the customer believes it’s worth. It focuses on perceived value and the willingness to pay associated with that value.

According to reports by SBI, value-based pricing is now the second most common strategy among certain businesses, used by 33% of companies. It falls just behind competitor-based pricing at 38%, and ahead of cost-plus pricing, which is used by 30%. Let’s take a closer look at how these three dominant strategies differ:

Value-Based Pricing (33%)

Rather than anchoring price to internal factors like costs or external ones like market averages, value-based pricing reflects how much benefit the customer expects to gain from your product. It requires a deep understanding of your buyer personas, pain points and desired outcomes.

Competitor-Based Pricing (38%)

Also known as market-based pricing, this strategy involves setting your price based on what others in your market are charging for similar products or services. It’s a quick way to benchmark your offering – but it can also lead to a race to the bottom if not managed carefully.

Cost-Plus Pricing (30%)

This traditional model calculates the total cost of producing the product (including materials, labour and overhead), then adds a fixed percentage as profit. While simple and transparent, it often fails to capture the product’s real market potential or the customer’s willingness to pay.

Value-Based Pricing vs. Competitor Pricing

On the surface, this approach appears practical – it offers a sense of simplicity and reassurance. By researching what others in your space are doing, you can avoid pricing yourself out of the market or undercutting your value. It helps businesses feel confident that their pricing isn’t too far off from industry norms.

However, the major downside of this strategy lies in its focus. Rather than centring your pricing around what your customers truly value or are willing to pay, you’re anchoring it to potentially arbitrary figures set by other businesses. These competitor prices may be based on internal goals, outdated strategies, or completely different target audiences.

This lack of clarity can result in a misaligned pricing strategy that doesn’t reflect your offering’s unique value. It also risks reducing your competitive differentiation. When you price just slightly above or below competitors, you’re communicating your product’s place in the market based solely on cost, not on benefits, outcomes, or superiority. As a result, competitor pricing can hold your business back from standing out.

Value-Based Pricing vs. Cost-Plus Pricing

For many, this model is appealing because it’s straightforward. It guarantees that your costs are covered and provides predictable margins, which can be especially important for budgeting and forecasting.

Yet this simplicity comes at a price. By focusing entirely on internal costs and profit targets, cost-plus pricing overlooks what matters most in any market: the customer. It fails to consider how much the customer benefits from your product – and how much they might be willing to pay for that benefit.

Another limitation of cost-plus pricing is that it often leaves money on the table. If a customer perceives your product to be significantly more valuable than your cost-based pricing suggests, you miss an opportunity to charge a premium. Arbitrary margin targets, like adding 20% on top of production costs, can cap your revenue potential unnecessarily. In a value-driven economy, that’s a missed opportunity for growth.

Ultimately, value-based pricing offers a smarter, customer-centric approach that not only reflects what your products are truly worth – but also unlocks greater profitability and long-term growth.