Value-based pricing means setting your price according to the value a customer gets from your product or service, rather than what it costs you to deliver or what competitors charge. Work out the customer's next-best alternative, add the extra value you create on top of it, then charge a share of that total, leaving the customer a clear gain. Your costs still set the minimum.
Key takeaways
- Economic value = reference value (the next-best alternative) + differentiation value (what you add).
- Price between your cost floor and the economic value, and leave the customer a clear gain.
- It's the opposite of cost-plus, which starts from your costs and adds a markup.
- It needs evidence: interviews, pilots or willingness-to-pay research, not guesses.
Harvey, the legal AI company, is reported to charge somewhere between $1,200 and more than $2,000 per seat per month.
For software, that's an eye-watering number. Most business tools cost less than a takeaway lunch per user.
But Harvey isn't pricing against software. It's pricing against lawyer time. And next to a lawyer's hourly rate, a monthly seat that saves hours of drafting looks cheap. That's value-based pricing in one sentence.
What does value-based pricing mean?
Value-based pricing means you set your price from the value the customer gets, not from what it costs you to deliver, and not from what your competitors charge.
There are three ways to set a price:
| Method | Starts from | The question it answers |
|---|---|---|
| Cost-plus | Your costs, plus a markup | "What do I need to charge?" |
| Competitor-based | What others charge | "What does the market charge?" |
| Value-based | The customer's gain | "What could I charge?" |
Cost-plus sets your floor. Value-based pricing shows you the ceiling. The right price is somewhere in between.
The value-based pricing formula
Economic value = Reference value + Differentiation value
- Reference value is what the customer's next-best alternative costs: a competitor, a spreadsheet, a staff member's time, or doing nothing.
- Differentiation value is the extra you create on top: hours saved, revenue gained, mistakes avoided, minus any switching effort.
Price below the economic value so the customer keeps a clear gain. That gain is their reason to buy, and their reason to stay.
A monthly bookkeeping subscription (illustrative)
A café owner does her own books. It takes her about 8 hours a month, and she values her time at $50 an hour. Her alternative is a basic software subscription at $40 a month.
Reference value: $40. Differentiation value: 8 hours back × $50 = $400, plus fewer late-lodgement worries. Economic value: about $440 a month.
If the bookkeeper's cost to deliver is $150 a month, a price of $290 leaves a healthy margin and still gives the owner $150 a month of clear gain.
How it connects to the book
In Chapter Three of The Subscription Playbook I told the story of Haven, RapidSOS's emergency app. People threw the promotional cards in the bin, because they couldn't see why they'd pay $2.99 a month for what 911 already gave them free.
The lesson: "A subscription doesn't work if your customers can't see the benefit of paying a regular price for your service." Value-based pricing forces you to answer that question before you set the price.
Subscription Price CalculatorWork out a profitable monthly price after costs, GST and fees.Open the free tool →What people confuse it with
Value-based pricing vs willingness to pay. Value is what the customer gains. Willingness to pay is the most they'll actually hand over. They're related, but customers often won't pay the full value, especially if they can't measure it.
Value-based vs outcome-based pricing. Outcome pricing charges per result. It's one way of capturing value, not the only one.
Value-based vs "value pricing". In professional services, "value pricing" often just means fixed fees. See value pricing for accountants.
Check your price covers your costs
Before you price on value, find your floor. The free Subscription Price Calculator works out a profitable price after costs, GST and fees.
When value-based pricing is the wrong choice
When you sell a commodity with many identical alternatives, the reference value is the market price and there's little room above it. When the value is impossible to measure, you'll struggle to justify the price. And when customers' gains vary hugely, one price can't fit everyone, so you'll need tiers or a value metric.
What to do next
Pick your best customer. Write down their next-best alternative and what it costs. List what you add on top, in dollars. If the total is well above your price, you have room to raise it.
For six steps and a full worked example, read the guide to value-based pricing, or the version for service businesses. Then test the number with the Van Westendorp Calculator.
Back to the subscription and pricing glossary.
Frequently asked questions
What's the difference between value-based pricing and value pricing for accountants?
In accounting and legal firms, 'value pricing' usually means quoting a fixed fee for an agreed scope instead of billing hours. That's a step toward value-based pricing, but not the whole thing. True value-based pricing sets the fee from the client's gain, such as tax saved or time freed, rather than from the hours the firm expects to spend.
Is value-based pricing legal in Australia?
Yes. Businesses are generally free to set their own prices. What the Australian Consumer Law prohibits is misleading or deceptive conduct, such as overstating the savings or results a customer will get. If you quote value numbers in your marketing, make sure you can back them up. This is general information as at October 2026, not legal advice.
Can a small business use value-based pricing?
Yes, and small businesses often find it easier, because they talk to customers directly. Ask what the problem costs them today, what they've tried, and what fixing it would be worth. Three or four of those conversations will tell you more than a spreadsheet. Then test a price with a handful of new customers before rolling it out.
What are the disadvantages of value-based pricing?
It takes research, the value differs from one customer to the next, and it can be hard to prove. Customers may also push back if they think you're charging for their success rather than your work. That's why most businesses combine it with tiers or a value metric, so customers who get more value pay more automatically.
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Robert Coorey, MBA
Robert is the author of The Subscription Playbook and Feed a Starving Crowd and a Director at BPAG Accountants in Sydney. More about Robert.
Sources
- Vaquill: Legal AI pricing benchmark (updated 3 Jul 2026)
- Intercom (Fin) pricing, checked 27 Oct 2026
- ACCC: False or misleading claims (business)
Facts and prices checked 27 October 2026. Spotted something out of date? Tell us.