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Value-based pricing replaces a cost mark-up with evidence of what each customer gains, gathered from the customer and expressed in the customer's own figures. Pricing Insight builds that evidence through Customer Value Discovery, then turns it into a price corridor of floor, target and ceiling that the sales team can hold.
Your list prices are cost plus a margin, and nobody in the business can say what customers would pay.
Why do differentiated businesses price like commodities?
Business-to-business (B2B) teams believe their products are differentiated and price them as if they were not. Across six Pricing Insight client diagnostics, staff scored their business highest of 16 pricing techniques on rejecting a commodity mindset, at 71.5%, and lowest on cost-plus pricing, at 51.1%. The gap between those two scores is where margin goes.
Cost-plus pricing produces one of two results on every line. Price sits above what a customer will pay and the business misses revenue, or below what the customer would pay and the business misses margin.
What do the diagnostics show?
- Customers understand the value they receive compared with competitors: 70.5% (five diagnostics, 663 respondents).
- Marketing educates customers to buy on value, not lowest price: 59.2%.
- A documented method sets prices by product or service: 56.7%.
- Team treats a differentiated product as a commodity: 67 mentions from 65 respondents (eight diagnostics).
- Sales cannot explain or defend the value delivered: 48 mentions from 41 respondents.
- Prices set as cost plus a fixed margin: 47 mentions from 40 respondents.
- New products launched on cost plus a standard margin: 38 mentions from 33 respondents.
Staff believe customers see the value. Far fewer believe the business tells customers what that value is worth, or uses it to set price.
What does a customer actually value?
Two kinds of value. Value in Use is what the product or service does for the customer. Value at Risk is what the supplier protects the customer from when something goes wrong. Buyers negotiate hardest on the first and pay, without saying so, for the second.
The invoice is one of four prices a customer pays.
- Invoice price: delivery of the goods or performance of the service.
- Operating price: operation, maintenance and performance over the life of the purchase.
- Replacement and disposal price: replacing outdated or failed goods, and the cost of switching supplier.
- Risk mitigation price: the cost of supply, product or support failing.
A buyer who keeps the negotiation on the invoice line has already won it. The seller's task is to put the other three on the table, with numbers.
How is value evidence gathered?
Value is established in the customer's business, not in an internal workshop. An internal view is recorded as an assumption until a customer confirms it. Customer Value Discovery, Pricing Insight's method, gathers the evidence through structured customer interviews, compares the supplier with its main competitor on the items the customer rates as important, and converts the largest gaps into dollar figures the customer's finance team can test.
In the reference case, a plastics manufacturer supplying a cable producer outperformed its lower-priced competitor on 24 of the 27 items the customer rated important. The largest gaps were input-cost management, flexible supply, liquidated damages avoided, capital expenditure avoided and onsite technical support. Together they supported a 35% value premium. The supplier's price sat 20% above the lowest bidder, and it kept the business.
At a medical technology supplier, interviews across a hospital group with surgeons, theatre nurses, procurement, sterilising services managers and the chief financial officer showed that up to 30% of the value drivers that mattered to customers were missing from sales material or undocumented.
How does value evidence become price?
Value evidence sets the ceiling. Cost sets the floor. The customer's next-best alternative sets the reference point. A price corridor with a floor, a target and a ceiling for each product and customer segment puts the three together, so a sales representative knows where a price can sit and who approves a move below target. New products are priced from value at launch, before a cost-plus habit sets in.
Measured across Pricing Insight's Customer Value Discovery implementations, the program delivers 50 to 100 basis points (bps) of margin expansion on addressable revenue. For a business with A$200,000,000 of addressable revenue and a 5% margin on earnings before interest and tax (EBIT), 75 bps of realised price with volume held adds A$1,500,000 of EBIT, a 15% increase. That example is illustrative.
Next step
Take one important account through Customer Value Discovery with Ron Wood and see what its value evidence supports. Ron's number is +61 410 534 099.
Technique scores are from the Pricing Insight benchmark register (six clients). Statement scores are from the cross-client statistics workbook (five diagnostics, 663 respondents, 2019 to 2025). Comment counts are from the cross-client register (eight diagnostics, 810 respondents). Clients are identified by sector only. The plastics reference case is from the Customer Value Discovery toolkit.
