Value-Based Pricing: Stop Letting the Buyer Set Your Price

Who in your company owns price?

Not the price list. The decision about what this customer pays for this offer, this year, and why. Ask in most businesses and you get a pause, then three different names. Product development has a department. Marketing has a budget. Sales has a team and a target. Price, the one lever that goes straight to the bottom line, often belongs to nobody in particular, which usually means it belongs to the customer’s buyer.

Oscar Wilde gave Lord Henry the line in The Picture of Dorian Gray: “Nowadays people know the price of everything and the value of nothing.” He was not talking about procurement, but he could have been. Buyers today can see every competing price on their phone, track every supplier’s performance in a system and choose from a global market. Of course they push. If they can buy cheaper, they will. The question is whether you give them a reason not to. That is what value-based pricing is about, and I spent a whole chapter on it in my book Infinite Value. This is the short version.

Why your price keeps getting pushed down

When a supplier’s prices are under pressure, it is almost always for one of three reasons, and they need very different responses.

The first is that your offer simply is not different enough. You are in the commodity trap, and no amount of negotiating skill will get you out; only a better offer will. The second is that your offer is genuinely different and does add value, but you have not shown it or captured it. The value is real, the customer cannot see it, and so they treat you like everyone else. The third is that the customer sees the value clearly and still cannot justify the price, perhaps because the budget sits in one place and the benefit lands in another.

Most of the price pain I see sits in the second and third. Both are fixable, and both need a value conversation, not a discount.

Three forces, and only one you can really move

It helps to think of price as being shaped at three levels.

At the widest level are the macro forces: interest rates, energy, commodity markets, regulation. You cannot argue with the oil price. Inside that sit the industry forces, supply and demand and what competitors are doing. You have a bit more room here, but when supply is plentiful, customers compare and pick the lowest. At the centre is the individual customer, and this is where value-based pricing lives. Here the price reflects what your offer is worth to this customer’s business, and that depends on how well you understand them, how good your offer is and whether they trust you to deliver it.

McKinsey’s Marn, Roegner and Zawada made a similar point in The Power of Pricing, arguing that the most effective path is often to get the price right one customer and one transaction at a time. That is exactly how I think about it. Value-based pricing is pricing customer by customer, and it is a by-product of doing everything else in value-based selling properly.

Be realistic. Not everything you sell will command a premium. There will always be a blend of commodity lines and genuine value. The point of the work is to shift that blend.

The one per cent that changes everything

Here is the number that should make every managing director sit up. In the same McKinsey analysis of a typical large US company’s income statement, a one per cent rise in price, with volumes holding steady, lifted operating profit by around eight per cent. A one per cent cut did the reverse.

Now compare where we spend our effort. New products take years, cost a fortune and often fail. New channels and promotions take months. A price change can be made in days, costs almost nothing to implement and lands on the bottom line almost immediately. And yet when times get hard, the reflex is to cut costs and people, which is slow, expensive and only ever saves the cost.

None of this means every price should go up. Some lines are rightly sold cheaply to fill a plant or complete a package. But go through your portfolio and you will almost certainly find places where you are giving money away out of habit. As a general manager I worked with on a pricing review put it, “there is nothing strategic about losing money.”

The red light problem

Value-based pricing has a trap of its own, and a customer taught it to me.

I was selling a chemical management programme to a large food manufacturer. We had done our homework: savings in operations, safety benefits, better quality, a cleaner site. I was sure of the value, and our price reflected it. Then the maintenance manager told me about another salesman who had tried to sell him a small warning light for the top of his chimney. The pitch was that it would stop an aircraft flying into the stack, saving millions. So, he asked me, should he pay a million pounds for a light that cost a hundred?

He had a point. The value you can calculate is not the price you can charge. There is always a limit, and it depends on who you are talking to; the buyer sees value differently from the quality manager. You will rarely capture all the value you create, and some weeks you will take a hit to win the business.

That is why I find it useful to picture a zone rather than a number. At one end is your full cost to serve plus the margin you need. At the other is the maximum value the customer could realise. Neither end is a real price: nobody should supply at cost, and nobody pays for all the value. Somewhere between the two is a price both sides can live with, where you each believe the deal will deliver what your businesses need. The discipline is knowing both ends in hard numbers before you walk in, so that the negotiation happens on value and not on the buyer’s terms. I set out the underlying relationship in price, cost and value.

Price is more than the number

When you build a commercial offer, price turns out to be a set of choices, not one figure.

Split what you supply into the transactional elements and the genuinely value-adding ones, and price them differently. Think about time: a long project with staged payments is a different animal from ad hoc supply. Count every cost, including rebates, special deliveries, currency swings and payment terms; a customer who pays in 120 days rather than 30 is costing you real money. Decide how service is handled, whether it sits inside the product price, alongside it as a fee, or as part of a total solution. (Bury the service in the product price and the next new buyer will simply think you are expensive.)

Then there is the structure of the contract itself. A fixed, pre-agreed price is the familiar option. An outcome-based price, where the customer pays when agreed results are achieved, is the purest form of value pricing, and it tends to earn the supplier more because it asks the supplier to carry the risk. Most good contracts end up as a hybrid: a core fee to cover the basics, with extra payments tied to agreed targets. Customers like it for an obvious reason. It puts your money where your mouth is, not theirs.

Making it a capability, not a campaign

Value-based pricing does not survive as a one-off project. In my experience it needs five things.

It needs the leadership team to recognise that price and value are connected, and to give a small team (part-time is fine to start with) real time to build the approach. It needs to be built into the capabilities around it, because without good key account management, value-based selling and offer development there is nothing to price on. It needs people trained and coached until value thinking shows up naturally in their account plans, proposals and negotiations. It needs a steady feed of what customers think and what competitors do, because value is always relative; a me-too offer earns a me-too price. And it needs someone to review it regularly and adjust it, because markets move.

Where the full argument lives

This is the compressed version. The full treatment, with the models, the customer price framework and the worked examples, is in Chapter 10 of Infinite Value, which sits alongside the rest of the value-based business model the book sets out. If you want the companion piece on the proposition that value-based pricing depends on, read how customer value propositions power B2B growth.

I still think about that maintenance manager. He was right about the light, and he was doing his job. But notice where his question took us: away from my margin and on to what his plant was worth to him. Even when you lose that round, it is the right room to be arguing in.