Cost-based vs. value-based pricing: Which is right for you?

Choosing the right pricing strategy is one of the most critical decisions you'll make when bringing a product to market.

Get it wrong, and you risk leaving money on the table – or worse, pricing yourself out of your own market.

Get it right, and you can make maximum profit, attract your ideal customers and carve out a solid competitive edge.

Two of the most common pricing strategies businesses lean on are cost-based pricing and value-based pricing. They approach the same problem – what to charge – from completely different angles.

In this blog, we break down what each strategy involves, explore their pros and cons and help you decide which one makes the most sense for your business.

1. What is cost-based pricing?

Cost-based pricing is exactly what it sounds like: pricing your product based on the total cost to produce it, plus a fixed mark-up for profit.

At its core, the formula is simple:

Cost of goods sold (COGS) + Mark-up = Price

For example, if it costs you £50 to manufacture a product and you apply a 40% mark-up, the final price would be £70. This strategy makes sure you cover your costs and hit a target profit margin.

Cost-based pricing is widely used in industries where production costs are stable and predictable – like retail, manufacturing and wholesale.

It's especially appealing for physical products where the cost of raw materials, labour and shipping are easy to quantify.

Example:

Let's say you sell handmade leather wallets. Your costs break down like this:

• Leather: £15

• Labour: £20

• Packaging and shipping: £10

• Total cost = £45

• Add a 50% mark-up, and your retail price becomes £67.50.

Why businesses use cost-based pricing

• Simple: It's easy to calculate and put in place.

• Predictable: It gives businesses control over profit margins.

• Scalable: Applying it across large product lines is fairly routine.

But while it's straightforward, cost-based pricing doesn't account for how much customers are actually willing to pay – something we'll dig into when we explore value-based pricing next.

2. What is value-based pricing?

Value-based pricing flips the script. Instead of basing your price on what it costs you to produce the product, you price it based on what your customers believe it's worth.

This strategy relies heavily on customer perception, brand positioning and the unique value your product delivers. The idea is to capture more of the value you're creating for your customer – not just cover your costs.

How it works

Instead of asking, "What will cover my costs and give me a reasonable profit?", you ask, "What is the customer willing to pay based on the value they perceive?"

This approach is common in industries where differentiation (being unique), brand equity or customer experience plays a huge role – think SaaS (software as a service) products, luxury goods, consulting services and tech.

Example:

Let's say you sell a time management app that saves busy professionals five hours a week. If your ideal customer values their time at £50/hour, that's £250 in perceived weekly value.

Even if your costs to deliver the software are very low, you could price it at £50/month and still offer customers incredible value.

Why businesses use value-based pricing

• Higher margins: If your product solves a big problem or offers exceptional value, you can charge a premium.

• Customer alignment: It forces you to understand your customers deeply.

• Brand strength: It positions your product as more than a commodity.

Of course, the challenge lies in accurately gauging customer perception and justifying your price point – especially in competitive markets.

3. Key differences at a glance

Let's break down the core differences between cost-based and value-based pricing:

By understanding these differences, you can better assess which approach – or combination – fits your business model and plans for growth.

4. Pros and cons of each approach

Let's take a closer look at the strengths and weaknesses of each pricing model to help you see the practical implications beyond just the theory.

Cost-based pricing

Pros

• Simple to work out: Easy for small teams or early-stage businesses to implement without needing lots of data.

• Predictable profit margins: As long as your costs remain stable, you can forecast revenue and profit accurately.

• Scalable across product lines: Ideal for businesses with many SKUs (stock-keeping units) where individual customer value is harder to assess.

Cons

• Ignores customer perception: You might undercharge or overcharge based on what customers are truly willing to pay.

• Not market responsive: Doesn't account for competitor pricing, trends or market demand.

• Limits profit potential: You're capping prices based on cost, not on how much value you deliver.

Value-based pricing

Pros

• Customer-aligned: Forces you to understand and communicate your value, which often improves marketing and positioning.

• Higher profit margins: If your product carries the perception of high value, you can price above your competitors and boost profits.

• Builds stronger brands: This strategy often leads to premium positioning and better customer loyalty.

Cons

• Complex to implement: Requires in-depth customer research, competitive analysis and possibly pricing experiments.

• Harder to justify without proof: If your brand is new or unproven, customers may hesitate at premium pricing.

• Risk of misjudging value: If you get the perceived value wrong, you could price yourself out of the market.

5. When to use each pricing strategy

Choosing the right approach depends on your business model, the type of product you sell and your customer base. Here are some key factors to guide your decision:

When cost-based pricing makes sense

• You sell physical products with clear, fixed costs.

• Your industry is price-sensitive or highly competitive (for example, retail, FMCG).

• Your brand isn't well recognised or you have limited customer data.

• You're in the early stages and need a quick, reliable pricing method.

When value-based pricing is better

• You offer a unique product or service with a clear way to set it apart from the competition.

• Your customers focus on quality rather than price.

• You operate in service, SaaS or luxury markets where experience and perception matter.

• You have the resources to research customers' needs and behaviours.

Both strategies have their place, and many businesses actually blend the two – starting with a cost-based baseline and adjusting upward based on customer value and market demand. We'll explore that hybrid approach in the next section.

6. Hybrid strategies: Can you use both?

Absolutely  – and many successful businesses do.

While cost-based and value-based pricing are often positioned as opposites, they don't have to be mutually exclusive.

In fact, combining the two can help you ground your pricing in profitability while still taking advantage of customers' willingness to pay.

What is a hybrid pricing strategy?

A hybrid pricing strategy starts by making sure you're covering your costs (cost-based baseline), then adjusts the final price based on customer perception, brand positioning and market context (value-based layer).

This gives you the best of both worlds:

• A floor price that protects your margins.

• A ceiling price influenced by what your customers are willing to pay.

Example:

Let's say it costs you £30 to manufacture a product. Your cost-based floor might be £45 (with a 50% mark-up).

But based on competitor pricing and customer interviews, you discover people would gladly pay £65 for the value your product delivers.

So, your final price could land at £60 to £65 – above your baseline, but still matching customers' expectations.

When to consider a hybrid approach

• You want to make sure you're profitable but don't want to leave value on the table.

• You operate in a competitive market where flexible pricing is key.

• Your product line includes both commoditised and value-rich items.

• You're transitioning from cost-based to value-based pricing and want to do it in phases.

Tips for implementing a hybrid strategy

• Know your margins: Always calculate your cost-based floor to protect your business.

• Understand your customer deeply: Surveys, interviews and data on buying behaviour can reveal what they truly value.

• Test and iterate: Run pricing experiments or A/B tests to validate your assumptions.

• Train your team: Especially in sales or customer support, where pricing objections may come up.

Using a hybrid strategy allows you to be pragmatic while still focused on growth. It creates a flexible framework where pricing evolves alongside your product, market and brand.

Final thoughts

There's no one-size-fits-all answer when it comes to pricing. The "best" approach depends on your product, industry, customers and stage of growth.

• Cost-based pricing is ideal for businesses that need simplicity, predictability and a margin-first approach – especially in product-heavy or price-sensitive markets.

• Value-based pricing works best when your offering is unique, your brand has equity and your customers are willing to pay a premium for the value you provide.

And for many businesses, a hybrid approach offers the most balanced path – grounding your pricing in cost while still allowing you to make the most of perceived value.

At the end of the day, pricing isn't just maths – it's a strategic decision that affects your brand, positioning, profitability and customer relationships.

The more you understand your customers, costs and competition, the more confidently you can price your products for sustainable success.

Relevant resources

• How to price your handmade goods

• How to develop a promotional and pricing strategy when launching a retail brand

• Lunch and Learn: How to charge correctly as you scale