Key Takeaways
- A value based price strategy must quantify what customers gain, not just calculate costs, margins, and competitor benchmarks.
- Price elasticity predicts demand responses; it does not prove the economic value customers receive.
- When pricing, product, and sales teams share no ownership of customer value, pricing decisions lack accountability.
- Businesses that cannot explain what a price delivers face growing commercial, transparency, and regulatory risks.
Most businesses can explain how their prices are calculated. Far fewer can explain what those prices are worth to the customer. A value based price strategy closes that gap, yet many businesses still rely on cost, competitor benchmarks and price elasticity. That disconnect is becoming a bigger commercial risk than many CEOs realise.
I asked a CEO recently how his business prices. “Value-based,” he said, without hesitation. I asked to see the value model. Silence. Then: “We take cost, add our margin, check what the competition is doing, and the pricing team has an elasticity curve.” I asked which part was value. “The margin,” he said, then laughed, because he’d heard himself.
He’s typical, and the gap between what leaders say and what their pricing rests on is no longer harmless.
Read This CEO Pricing Strategy To Improve Margin & EBIT
The pricing problem
Value-based pricing is not new. Forbis and Mehta set out economic value to the customer at McKinsey in 1979: start with the customer’s next best alternative, then add or subtract, in dollars, every way your offer differs. Anderson and Narus took it into business markets in 1998.
Practice has barely moved. A review of pricing surveys from 1983 to 2006, spanning the US, Europe and Asia, found value-based pricing in use at only about 17 per cent of firms, with competition-based pricing at roughly 44 per cent and cost-based at roughly 37. Those are old, self-reported numbers, but my client work says nothing has flipped.
Australia looks no better, and in my experience it’s further behind. The Reserve Bank’s study of Australian firms found about half mainly cost-focused, using a fixed or variable mark-up, with only about one in ten mainly following competitors’ prices. That research is dated and doesn’t measure value-based adoption, but it matches what I see in Australian boardrooms: cost or margin first, a sprinkle of competitor benchmarking in the larger companies, and little evidence of what the customer actually gains.
What most teams run instead is a stack. Cost-plus sets the floor. A competitor benchmark sets the ceiling. Somewhere in between, a basic elasticity estimate picks the point. It isn’t value-based pricing with gaps. It’s a different method wearing its name tag.
Elasticity is the weak link, because it feels like customer insight. In practice it’s often a record of past price moves, muddied by promotions and competitor actions. Even done well, elasticity can estimate how demand responds to price. It cannot, on its own, establish the economic value a customer receives. A customer who gains enormously from you looks inelastic right up to the day they leave.
Why smart teams get value-based pricing wrong
Psychologists call it the illusion of explanatory depth. Rozenblit and Keil’s research found people feel they understand how things work far better than they do, until they’re asked to explain the mechanism step by step.
A pricing team with an elasticity model feels it understands customer behaviour. Ask it to explain why a specific customer pays what they pay and not ten per cent more, in terms of that customer’s own economics, and the understanding turns out to be thinner than it felt.
I hear it in the room. “Elasticity says we can take four per cent.” Does anyone know what we save them each year? “We haven’t measured that.” That answer is the whole problem, delivered calmly.
The structure makes it worse. Pricing teams do the price. Product managers do the value, but only as features and benefits. Nobody owns the number in the middle: what the customer actually gains. So the value question never gets asked by anyone whose job it is to answer it.
The result is false confidence. A business with analysts, models, elasticity curves and dashboards assumes its prices are evidence-based. But the one piece of evidence that connects the price to the customer may be missing. Without that evidence, a business cannot show that its value-based price strategy reflects what customers actually gain.
What a value based price strategy means for your business
Here’s why this matters beyond margin. Customers may not expect to know exactly how a price was calculated. But they do expect a defensible relationship between what they pay and what they receive. If your pricing rests on cost, a benchmark and elasticity, you may not be able to show one.
Regulators are now asking a related but separate question: can customers see how a price was set? The FTC’s January 2025 study found intermediaries using location, browsing history and even abandoned carts to shape individual prices, working with at least 250 clients. It was preliminary, not an allegation against any company. In August 2026 the FTC proposed a policy statement warning that undisclosed personalised pricing may breach the FTC Act. It’s a proposal, not settled law.
Two contested US matters raise transparency and competition questions. The FTC and 22 states allege Amazon used an undisclosed “soft reserve price” in its ad auctions; Amazon denies wrongdoing. A class action alleges eight fuel retailers coordinated pump prices through shared pricing software; Kalibrate says it disagrees with the claims. Neither is decided, and intent is for the courts. Neither is about whether those businesses measured customer value. But as alleged, each involves a price outcome produced by a mechanism the customer couldn’t see, and each raises a question every business should be able to answer.
When a business cannot explain what its price is worth, it becomes easier to substitute a different question: how much can we charge before the customer objects? Value-based pricing asks what you’re worth to the customer. Under-the-radar pricing asks what the customer won’t notice.
Whatever the courts decide, both force one question: who inside the business decided this price was right, and on what evidence? When nobody owns the value number, nobody can. Accountability for the price doesn’t sit with pricing, product, sales or the CEO. It sits nowhere, until a regulator, a court or a journalist goes looking for it.
Value-based pricing isn’t a claim that a price is fair simply because a customer will pay it.
It’s the discipline of establishing what the customer gains, compared with their next best alternative, and using that evidence to inform the price. That includes the vague middle between your cost and their willingness to pay that everyone prefers to skip because it’s hard to measure. It is hard. You have to go into the customer’s business, find their downtime, their labour, their risk, and put numbers on it. But that middle is where a price becomes explainable, and a price you can explain is the precondition for one you can keep transparent.
Cost, competitor benchmarks and elasticity all have a place. The mistake is treating them as a substitute for understanding what the customer actually gains. And the exposure is growing. In July 2026 the Australian Government named retail surveillance pricing as a priority for review under consumer law, and the FTC is moving the same way.
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Three questions to test your value based price strategy
So three questions for your next leadership meeting.
Can we prove the value? Ask for the value model on your ten biggest accounts: what you save, earn or protect for each compared with their best alternative. If cost, a benchmark and elasticity come back, you have your answer.
Could we explain every price to the customer paying it? If the explanation would sound like a confession, that’s exposure with a delay on it.
Who owns the value number? Not a committee: one name, with authority across product, pricing and sales.
If nobody owns the value number, nobody can explain why the price is right. Someone in your business should be able to stand in front of a customer, a regulator or your board and say: here’s what this price buys, here’s how we know, and I’m accountable for it. If that person doesn’t exist, you don’t have a pricing strategy. You have pricing that’s waiting to be questioned.
If you’d like to find out who that person is, or who it needs to be, message me directly.
Read This CEO Pricing Strategy To Improve Margin & EBIT
Are you a business in need of help aligning your pricing strategy, people, and operations to deliver an immediate impact on profit?
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