Cost, Competitive, and Value-Based Pricing

There are three ways to set a price: what it costs you to deliver (cost-plus), what competitors charge (competitive), and what the customer is willing to pay for the value received (value-based). Cost-plus guarantees margin but ignores demand. Competitive pricing benchmarks against others but commoditizes your offering. Value-based pricing captures the maximum the market will bear for the outcome you deliver. It is the hardest to implement and the only one worth implementing.

1. Cost-Plus Pricing Take your cost to serve ($3,000/customer/year), add your target margin (70%), and set the price ($10,000). Simple, defensible, and wrong. Cost-plus ignores the customer's willingness to pay entirely. If your product saves them $200,000 per year and you charge $10,000, you are capturing 5% of the value you create. That is not pricing — it is charity.
2. Competitive Pricing Survey the market, find the average price point ($25,000), and position relative to it. This works if your product is undifferentiated — and if it is, pricing is the least of your problems. Competitive pricing caps your revenue at what the market has already established. It precludes premium positioning and rewards race-to-the-bottom dynamics.
3. Value-Based Pricing Quantify the economic value your product creates for the customer ($200,000 in annual savings), then capture a percentage of that value (15-25% is typical). Your price: $30,000-$50,000. The customer saves $150,000-$170,000 and you capture 3-5x what cost-plus would yield. Value-based pricing requires understanding your customer's economics — which forces exactly the customer intimacy that drives retention.