Use cost-plus to establish a viable floor and customer value and alternatives to establish the ceiling, then test a price inside the credible band.
Short answer: Use both. Cost-plus gives you the minimum price that covers delivery, capacity, overhead and required profit. Customer value and credible alternatives give you the upper boundary a buyer may rationally accept. A new business should test inside that band, never price below the cost floor and never claim a value ceiling it has not established with customer evidence.
Cost-plus is criticised for ignoring what the result is worth. Value-based pricing is often presented as permission to charge a large share of an impressive outcome. Both become dangerous when used alone.
A buyer does not owe you a margin because your process is expensive. They also do not owe you 10% of a theoretical saving you cannot deliver or measure. Your price must work for the business and remain preferable to the customer’s realistic alternatives.
Build the Floor-Ceiling Pricing Band
The Floor-Ceiling Pricing Band produces a range before you choose one test price.
- Delivery floor: Calculation: Direct cost plus constrained owner or staff time; Evidence: Time records, supplier prices and scope
- Viability floor: Calculation: Delivery floor plus required overhead and profit contribution; Evidence: Capacity and monthly cost
- Alternative ceiling: Calculation: Cost of the buyer’s next-best credible option; Evidence: Buyer interviews and comparable offers
- Value ceiling: Calculation: Conservative value of the result the buyer believes is achievable; Evidence: Customer records, mechanism and time period
- Test price: Calculation: A number between viable floor and the lower credible ceiling; Evidence: Quotes and completed contribution
If the viability floor sits above both ceilings, the offer does not fit that customer. Reduce delivery cost, narrow scope, find a higher-value situation or do not sell it. Persuasive wording cannot create an economic band where none exists.
My position is that pure value-based pricing is usually premature for a new business. Use a hybrid until you have repeatable evidence about outcomes, alternatives and buying behaviour.
Calculate a floor that includes capacity
List direct materials, subcontractors, travel, transaction fees and delivery labour. Add the value of founder time at the minimum contribution the business needs per constrained hour.
Then allocate enough overhead and profit for the volume you can realistically deliver. A 30% mark-up on direct cost is not automatically viable. If the business can complete only six projects a month, each project must recover one-sixth of monthly fixed cost before profit.
Distinguish mark-up from margin. A cost of £100 plus a 25% mark-up gives a £125 price and £25 gross profit. The margin is £25 ÷ £125 = 20%, not 25%.
Cost-plus protects against selling busy losses, but it does not tell you whether the customer cares enough to buy. An inefficient process can create a high floor that the market reasonably rejects.
Find the next-best alternative
Ask customers what they would do without you. Alternatives include another provider, internal staff, a narrower service, delayed action and doing nothing. Obtain prices and internal costs where the buyer knows them.
Do not assume your category competitor is the only comparison. A £2,000 consultant may compete with a manager spending 60 hours internally, not another consultant. Conversely, doing nothing may cost little when the problem is inconvenient rather than urgent.
Compare scope, risk and timing. A cheaper alternative requiring the buyer to manage three suppliers is not identical, but its inconvenience needs evidence before you attach a monetary premium.
Establish value without inventing it
Value can be increased revenue, avoided cost, released time, reduced risk or a completed decision. Use the customer’s baseline records and a defined period. Separate what your work controls from what depends on implementation, market conditions or other suppliers.
Build a conservative case and a weak case. If your work identifies a saving but the customer chooses whether to act, price primarily for the controlled output until implementation evidence exists.
Never select an arbitrary percentage of value and call it a rule. The acceptable share depends on certainty, alternatives, risk allocation, payment timing and how much work the customer still has to do.
Worked example: ParcelRoot Returns Review
ParcelRoot reviews returns for independent footwear retailers. A proposed engagement analyses return reasons, customer messages and product-page information for one range.
Delivery requires 24 analyst hours at an internal required rate of £35, which is £840. Data preparation costs £120 and customer meetings cost £40 in travel and direct expense. Delivery floor is £1,000.
- Delivery floor: Calculation: £840 + £120 + £40; Amount: £1,000
- Required overhead and profit contribution: Calculation: 25% of delivery floor; Amount: £250
- Viability floor: Calculation: £1,000 + £250; Amount: £1,250
- Specialist alternative quote: Calculation: Comparable fixed scope; Amount: £1,500
- Internal alternative: Calculation: 45 staff hours at £28; Amount: £1,260
The lower credible alternative ceiling is £1,260, not £1,500. ParcelRoot therefore has a narrow band from £1,250 to £1,260. That is a warning, not a reason to choose £1,259 automatically.
The retailer records 60 sizing-related returns a month at £11 handling and postage cost, or £660. ParcelRoot believes clearer information may reduce some, but it has no evidence that its review controls the change. It should not claim a £7,920 annual value by multiplying £660 by 12 and implying all returns disappear.
At a £1,250 price, the customer could choose the specialist service rather than spending about £1,260 of staff time. ParcelRoot’s ten-pound band leaves little room for unexpected work. It narrows the scope to 20 products, reducing analyst time from 24 to 20 hours. Cost becomes 20 × £35 + £120 + £40 = £860. Adding 25% produces a viability floor of £1,075. A test price of £1,180 now sits below the internal alternative with £105 of room above the floor.
The example shows why value cannot rescue a poorly scoped cost base. Scope redesign created the viable band.
Choose a price inside the band
Start from the customer’s comparison, then check the floor again. A price close to the ceiling needs strong relevance, low buying risk and clear proof. A price near the floor may be appropriate while evidence is limited, but do not describe it as a discount from a fictional higher price.
Quote the same scope to five suitable prospects at one price. Record acceptance, objection, delivery cost and contribution. Test a second price with another five comparable prospects. Small samples do not establish a permanent optimum, but they expose whether the band is plausible.
Measure total contribution, contribution per constrained hour and customer fit. A higher price with fewer sales can be better when capacity is scarce. A lower price can be better when qualified leads are rare and unused capacity is high.
Know when each method deserves more weight
Cost-plus deserves more weight for commodity inputs, regulated reimbursement, tenders requiring cost detail, uncertain scope and early offers with little outcome evidence. Value deserves more weight when customer situations differ sharply, the economic result is measurable and your contribution is credible.
Fixed products still have value ceilings. Advisory services still have cost floors. The blend changes, but neither boundary disappears.
Review the value case after completed work. Ask what changed, over what period and what else contributed. Do not rewrite one customer result as a guarantee for the next.
Related guides
Set and test the price this week
In the next two days, calculate the delivery and viability floors from actual time, cost and capacity. Speak to five plausible buyers about their next-best alternative and baseline, without asking them to invent a preferred price.
By day four, write the lower credible ceiling and reject any offer with no band. Narrow or redesign it. Quote one price to five suitable prospects, then a second price to five comparable prospects. After ten decisions, keep the price that produces the stronger total contribution within capacity and remains honest about value.
Frequently asked questions
What is wrong with adding a standard mark-up?
Nothing, if the mark-up recovers fixed cost and profit at realistic volume and the resulting price remains acceptable to customers. The problem is assuming one percentage works across offers with different labour, risk and capacity. A 30% mark-up can be too low for a bespoke service and too high for a commodity product. Calculate the required contribution first. Also distinguish mark-up on cost from margin on price. Use the percentage as an output of the model, not a substitute for it.
Is value-based pricing just charging what the customer can afford?
No. It relates price to the economic or practical value of a result and the customer’s alternatives, while preserving fairness and consistent scope. Ability to pay may correlate with value but is not the same thing. Charging different unexplained amounts for identical conditions can damage trust and may raise legal issues. Define why value differs, such as scale, risk or urgency. Pricing and discrimination rules vary by country and sector, so seek qualified local advice for a specific practice.
How do I price value when the result is uncertain?
Price the controlled output and share risk explicitly. Use a conservative value case, a weak case and evidence about what your work can influence. Keep the uncertainty visible. You might charge a fixed diagnostic fee, then price implementation separately when the opportunity is known. Outcome-linked fees can align incentives but create measurement, timing and legal complexity. Do not price as though the best case is certain. Define baseline, period, data source and other contributing actions before using any value figure in a proposal.
Should I tell customers how I calculated the price?
Explain the scope, result, assumptions and price drivers. You do not usually need to disclose every internal cost or target margin unless a contract or procurement process requires it. Cost detail can distract from the decision, while secrecy about scope creates suspicion. That explanation helps buyers compare like with like. If the price changes by customer, state the operational reason, such as volume, deadline or complexity. In regulated or cost-reimbursed work, disclosure obligations may differ. Check the relevant local and contractual requirements.
Can I use value-based pricing for a physical product?
Yes. Buyers compare a product’s utility, risk, convenience, identity and alternatives, not only manufacturing cost. The cost floor still matters, as do retailer margins, taxes and channel fees. A product with strong perceived value but easy substitutes may have a lower ceiling than the founder expects. Test real purchases at viable prices. Measure returns and repeat buying as well. Do not infer willingness to pay from compliments. Where resale price restrictions or consumer rules apply, obtain qualified local legal advice.
What if competitors charge below my cost floor?
First check whether scope, quality, tax, channel and cost structure are comparable. They may have scale, lower input costs, a loss-leading model or simply poor economics. Protect the floor. You cannot sustainably match a price below your viable floor without changing something. Narrow the offer, remove cost, choose a segment with higher value or leave the market. A competitor’s price is evidence about alternatives, not an instruction to lose money. Test whether customers recognise a meaningful difference before assuming premium demand.
How often should I recalculate the pricing band?
Review the floor whenever supplier cost, delivery time, capacity or overhead changes materially. Review the ceiling when alternatives, customer baseline or outcome evidence changes. Record the input that triggered each revision. In a new business, a monthly check for the first six months is reasonable. Keep scope and classification consistent so you can interpret movement. Requote existing work according to contracts and notice terms. Do not change price after every conversation; collect a batch of comparable decisions before drawing a conclusion.
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