Most prices in industry and retail come about like this: take the purchase price, add a mark-up, done. The method is quick, defensible and built into almost every ERP. It has just one flaw — it knows your costs and nothing about the only thing that ultimately determines the price: the value the customer experiences.
The problem with cost-plus
Cost-based pricing is attractive because it produces a number you can defend. Nobody has to estimate, nobody has to negotiate, the mark-up sits in the price list. That is precisely the problem: the customer is not interested in your cost structure. They compare what your product does for them against what the alternative does.
Two systematic errors follow, and they occur simultaneously in almost every assortment:
- Too cheap on strong products. A part only you can supply, available at short notice, whose failure brings a customer's plant to a standstill, is priced with the same 35 per cent as a standard catalogue item. The customer would have paid considerably more — you never asked.
- Too expensive on weak products. An interchangeable item with eight competitors in the market gets the same mark-up and stands no chance. The revenue fails to appear, and in the reporting it looks as though the item is simply unattractive.
The two errors appear to cancel each other out in the overall margin. That is why the problem does not show up in the accounts — it only shows up when you work through the assortment item by item.
Value-based pricing reverses the order. Not: what does it cost me, what do I want to earn? But: what is it worth to the customer, what share of that can I realise — and does that sit above my costs?
What "value" actually means
Value is not a soft concept. It breaks down into four components, each of which can be expressed in euros:
| Value component | Question to the customer | Quantification |
|---|---|---|
| Reference value | What do they pay today for the next best alternative? | Competitor price, in-house solution, doing nothing |
| Performance difference | What can your product do more, or better? | Time saved, scrap rate, service life |
| Risk value | What does a failure or defect cost them? | Downtime cost per hour, contractual penalties |
| Transaction value | What does buying from you save them? | Lead time, ordering effort, stock capital |
The sum of these components is the economic value of your offer. Your price will necessarily sit below it — otherwise the customer would have no reason to switch. But with the right argument it sits considerably above what a cost mark-up would have produced.
How to actually measure willingness to pay
The most common objection is: "we cannot know that." You can — just not by asking directly. Ask a customer what they would be prepared to pay and you get a negotiating position, not information. Three approaches deliver reliable results in practice:
1. Analyse transaction data
The most honest data source is already in your ERP. Where were discounts granted and where not? For which items does volume collapse after a price increase, and for which does it not? Price elasticities can be estimated from historical changes as soon as there is enough price movement in the data. This analysis is inexpensive and often delivers 70 per cent of the insight.
2. Conjoint analysis and Van Westendorp
When you are pricing new products or entering a new segment, historical data is missing. Structured surveys then help: in a conjoint analysis, respondents repeatedly choose between product variants with different attributes and prices. From those choices you can calculate what price each individual attribute carries. The Van Westendorp method is considerably leaner and brackets an accepted price corridor using four price questions.
3. Structured customer interviews
In B2B markets with few large customers, the qualitative conversation beats any statistic. Not: "what would you pay?" But: "what does an hour of downtime cost you? How often did that happen last year? What have you done to avoid it?" From answers like these the risk value can be calculated directly — and the customer supplied it themselves.
From value to a price that holds
The analytically derived value price is worthless if it collapses in the sales conversation. The transition from analysis to enforcement decides whether the project succeeds — and it is routinely underestimated. Four building blocks are needed:
- Segmentation. Not every customer experiences the same value. An operation with expensive machinery values availability differently from an occasional buyer. Price differentiation by segment is not a trick but the logical consequence of different benefit profiles.
- Value argumentation. The field force needs a calculation, not a price list: "this version lasts 40 per cent longer. At your replacement interval that saves you €1,400 a year. The surcharge is €260." Without that calculation, every higher price turns into a discount conversation.
- Discount rules instead of discount freedom. If sales decides freely on concessions, price differentiation ends up in the hands of whoever gives in fastest. Clear approval limits with defined exceptions hold the structure together.
- Monitoring. Realised prices, not list prices, are the measure. Look only at the price list and you see a project that worked — and miss that the difference has flowed back out through discounts.
When the effort pays off — and when it does not
Value-based pricing takes more effort than a mark-up, and that effort does not pay off equally everywhere. As a rule of thumb: the more differentiated your offer and the higher the damage to the customer in the event of failure, the greater the lever.
| Situation | Lever | Recommended approach |
|---|---|---|
| Differentiated B2B product, high failure cost | Very high | Full value analysis, segmentation, sales training |
| Spare parts with mixed competitive intensity | High | Segmentation by availability and comparability |
| Traded goods with transparent price comparison | Medium | Value logic for own brands, rule-based repricing for the rest |
| Pure commodity, fully comparable | Low | Cost leadership and automation rather than value analysis |
In practice almost all assortments are mixed: part commodity, part differentiated. The first step is therefore rarely the value analysis — it is the segmentation that reveals where the analysis is worth doing at all.
A practical way in
You do not need a year-long project to begin. A sound entry point consists of three steps that can be completed in a few weeks:
- Segment the assortment. Place every item on two axes: competitive intensity and contribution margin. Four quadrants, four pricing strategies.
- Work through one product group. Take the group with the lowest comparability and the highest customer benefit. That is where the headroom is largest and the risk smallest.
- Test rather than roll out. Change prices in a defined segment or region, measure the effect over eight to twelve weeks, then scale.
The effect of such projects typically lands in the mid single-digit percentage range on margin — at an effort that usually pays for itself within the first quarter. Not because prices are raised across the board, but because for the first time they sit where they belong.
Pricing consulting — Price analysis, pricing strategy, value-based pricing and price enforcement in sales — services, approach and frequently asked questions.
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