Skip to Main Content
HBS Online
  • Courses
    Open Courses Mega Menu
    • Business Essentials
      • Credential of Readiness (CORe)
      • Business Analytics
      • Economics for Managers
      • Financial Accounting
    • Leadership & Management
      • Leadership Principles
      • Management Essentials
      • Negotiation Mastery
      • Organizational Leadership
      • Strategy Execution
      • Power and Influence for Positive Impact
    • Entrepreneurship & Innovation
      • Entrepreneurship Essentials
      • Disruptive Strategy
      • Negotiation Mastery
      • Design Thinking and Innovation
    • Strategy
      • Strategy Execution
      • Business Strategy
      • Economics for Managers
      • Disruptive Strategy
      • Global Business
      • Sustainable Business Strategy
    • Finance & Accounting
      • Financial Accounting
      • Leading with Finance
      • Alternative Investments
      • Sustainable Investing
    • Business in Society
      • Sustainable Business Strategy
      • Global Business
      • Sustainable Investing
      • Power and Influence for Positive Impact
    • All Courses
  • For Organizations
    Open For Organizations Mega Menu
    • Corporate Learning
      Help your employees master essential business concepts, improve effectiveness, and expand leadership capabilities.
    • Academic Solutions
      Integrate HBS Online courses into your curriculum to support programs and create unique educational opportunities.
    • Need Help?
      • Frequently Asked Questions
      • Contact Us
  • Insights
    Open Insights Mega Menu
    • Business Insights Blog
      • Career Development
      • Communication
      • Decision-Making
      • Earning Your MBA
      • Entrepreneurship & Innovation
      • Finance
      • Leadership
      • Management
      • Negotiation
      • Strategy
    • All Topics
    • Free Business Lessons and E-Books

      Gain actionable skills and insights to advance your career.

    • Free Guide

      Learn how to formulate a successful business strategy.

  • More Info
    Open More Info Mega Menu
    • Learning Experience
      Master real-world business skills with our immersive platform and engaged community.
    • Certificates, Credentials, & Credits
      Learn how completing courses can boost your resume and move your career forward.
    • Learning Tracks
      Take your career to the next level with this specialization.
    • Financing & Policies
      • Employer Reimbursement
      • Payment & Financial Aid
      • Policies
    • Connect
      • Student Stories
      • Community
    • Need Help?
      • Frequently Asked Questions
      • Request Information
    • Apply Now
Login
My Courses
Access your courses and engage with your peers
My Account
Manage your account, applications, and payments.
HBS Home
  • About HBS
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
HBS Online
  • Courses
  • Business Essentials
  • Leadership & Management
  • Entrepreneurship & Innovation
  • Strategy
  • Finance & Accounting
  • Business in Society
  • For Organizations
  • Insights
  • More Info
  • About
  • Media Coverage
  • Founding Donors
  • Leadership Team
  • Careers
  • My Courses
  • My Account
  • Apply Now
  • …→
  • Harvard Business School→
  • HBS Online→
  • Business Insights→

Business Insights

Harvard Business School Online's Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

 
Filter Results Arrow Down Arrow Up

Topics

Topics

  • Accounting
  • Analytics
  • Business Essentials
  • Business in Society
  • Career Development
  • Communication
  • Community
  • ConneXt
  • Decision-Making
  • Earning Your MBA
  • Entrepreneurship & Innovation
  • Finance
  • Leadership
  • Management
  • Marketing
  • Negotiation
  • News & Events
  • Productivity
  • Staff Spotlight
  • Strategy
  • Student Profiles
  • Technology
  • Work-Life Balance

Courses

Courses

  • Alternative Investments
  • Business Analytics
  • Business Strategy
  • CORe
  • Design Thinking and Innovation
  • Disruptive Strategy
  • Economics for Managers
  • Entrepreneurship Essentials
  • Financial Accounting
  • Global Business
  • Leadership Principles
  • Leading with Finance
  • Management Essentials
  • Negotiation Mastery
  • Organizational Leadership
  • Power and Influence for Positive Impact
  • Strategy Execution
  • Sustainable Business Strategy
  • Sustainable Investing
Subscribe to the Blog
RSS feed

Topics

Topics

  • Accounting
  • Analytics
  • Business Essentials
  • Business in Society
  • Career Development
  • Communication
  • Community
  • ConneXt
  • Decision-Making
  • Earning Your MBA
  • Entrepreneurship & Innovation
  • Finance
  • Leadership
  • Management
  • Marketing
  • Negotiation
  • News & Events
  • Productivity
  • Staff Spotlight
  • Strategy
  • Student Profiles
  • Technology
  • Work-Life Balance

Courses

Courses

  • Alternative Investments
  • Business Analytics
  • Business Strategy
  • CORe
  • Design Thinking and Innovation
  • Disruptive Strategy
  • Economics for Managers
  • Entrepreneurship Essentials
  • Financial Accounting
  • Global Business
  • Leadership Principles
  • Leading with Finance
  • Management Essentials
  • Negotiation Mastery
  • Organizational Leadership
  • Power and Influence for Positive Impact
  • Strategy Execution
  • Sustainable Business Strategy
  • Sustainable Investing
Subscribe to the Blog
RSS feed

A Beginner’s Guide to Value-Based Strategy

business team discussing value-based strategy
  • 03 Nov 2020
Tim Stobierski Author Contributors
tag
  • Economics for Managers
  • Strategy

Whether you’re a new product manager about to launch a product or service, an entrepreneur just getting your venture off the ground, or a business leader reevaluating your company's direction, it’s crucial to have the right pricing strategy to maximize profits.

A value-based pricing strategy offers a practical path forward for your company. Below is an in-depth examination of value-based pricing, including an overview of the value stick framework and the different components that make it so effective.

What Is a Value-Based Pricing Strategy?

Value-based pricing is a means of price-setting wherein a company primarily relies on its customers’ perceived value of the goods or services being sold—also known as customers’ willingness to pay—to determine the price it will charge. Because it revolves around customers’ priorities, it’s occasionally called customer-focused pricing.

Harvard Business School’s value stick framework offers a helpful way of visualizing the tenets of value-based pricing, as well as the ways firms can maximize profit margins while creating more value for their customers and suppliers.


Free E-Book: How to Formulate a Successful Business Strategy

Access your free e-book today.


The Value Stick

The value stick is a visual representation of a value-based pricing strategy’s different components. At the top of the stick is the value that’s been captured by the end consumer, called the customer’s delight. In the middle of the stick is the value captured by the firm, called the firm’s margin. At the bottom of the stick is the value captured by the firm’s suppliers, called the supplier surplus.

The value stick comprises four components: willingness to pay, price, cost, and willingness to sell. Where on the stick each of these points falls determines how a sale’s value is split between a firm, its customers, and its suppliers.

Value stick and its four components

Here’s a more in-depth look at each of these components.

1. Willingness to Pay

Willingness to pay (WTP) is the highest price a customer is willing to pay for your product or service. Customers are likely to make a purchase when companies charge any amount up to that threshold. Charging even a cent above that number heightens the risk that the customer will decide against purchasing.

The difference between the customer’s willingness to pay and the final price of the purchase is known as the customer’s delight. This is the level of goodwill, loyalty, and brand enthusiasm that the customer feels after making a purchase, which is typically tied to the value they’ve claimed from the transaction.

2. Price

Price refers to the final price a company charges when it sells a product or service. As such, price is the point on the value stick that a firm has the most control over. It can be set at any point between a firm’s cost of production and its customers’ willingness to pay.

When a firm sells a product or service, the value is split between the customer and the firm. As explained above, customers receive the difference between their willingness to pay and the actual price, while the company gets the difference between the price it charges and the costs associated with creating the product. This is referred to as the firm’s margin. Where the company chooses to set its price determines how value is shared with the consumer.

Naturally, companies aim to maximize profits from each sale. But they also strive to maximize customers’ delight to build brand loyalty and turn a single purchase into a repeat one. This creates a level of competition wherein a firm must find the optimal point on the value stick to achieve both goals.

3. Cost

Cost refers to how much money goes into producing a product or service, including all of its components. This includes physical costs, such as the various nuts, bolts, and widgets that make up an item, along with non-physical costs, such as utilities and rental space.

The lower a firm’s cost, the higher the value it can share with customers. This creates competition between a firm and its suppliers that work to drive the price up to maximize their value.

4. Willingness to Sell

Willingness to sell (WTS), also known as willingness to accept, is the lowest price a firm’s suppliers are willing to accept in exchange for the raw materials needed to create products. While many suppliers would like to sell goods for the highest amount possible to maximize profits, most are willing to reduce prices to a certain extent to make a sale. Their willingness to sell represents the lowest point they’re willing to drop before it no longer makes sense to pursue a sale.

The difference between the suppliers’ willingness to sell and the cost (what they charge the firm) is known as the supplier surplus—or the supplier delight—and it represents the value they’ve captured from a sale at the firm’s expense.

Using the Value Stick to Drive Value Creation

When the four points above are plotted along the value stick, they create three wedges: customer delight, firm margin, and supplier surplus.

Firms that embrace value-based pricing can manipulate these wedges in one of two ways. They can either adjust where the points of cost and price fall on the value stick, or they can work to increase the length of the stick (and the total value shared by all parties) by increasing customers’ willingness to pay and decreasing suppliers’ willingness to sell.

Here are four strategies companies can use to increase profit margin with the value stick framework:

1. Raise Prices

A firm can easily increase profit margins by raising prices without changing anything else. This allows them to capture a greater share of each transaction’s value at customers’ expense.

Your browser cannot play the provided video file.

2. Raise Customers’ Willingness to Pay

Firms can increase customers’ willingness to pay, in effect lengthening the value stick and increasing the total value that can be split. This enables them to raise prices while delivering enough value to keep customers excited and delighted about the purchase.

Your browser cannot play the provided video file.

3. Lower Costs

Firms can lower their costs by paying suppliers less, without changing anything else about the equation. This allows them to capture more value at the suppliers’ expense.

Your browser cannot play the provided video file.

4. Lower Suppliers’ Willingness to Sell

Firms can lower their suppliers’ willingness to sell, in effect lengthening the value stick and increasing the amount of shared value. This allows them to pay a lower cost while increasing the suppliers' surplus.

Your browser cannot play the provided video file.

Of the four strategies outlined above, numbers two and four allow firms the opportunity to increase the value wedges for all parties involved. This enables them to maximize profits without negatively impacting others. Strategies one and three, on the other hand, allow firms to maximize profits at the expense of customers and suppliers, growing their own value wedge while shrinking others'.

Which HBS Online Strategy Course is Right for You? Download Your Free Flowchart

Choosing the Right Strategy for Your Business

The real benefit of leveraging value-based pricing for your business is that it forces you to truly understand the motivations of all parties involved in a transaction—your company, suppliers, and customers. This understanding empowers you to make intelligent decisions around how you price your products or services and, compared to other strategies, often leads to more beneficial outcomes.

Are you interested in learning more about value-based pricing and other key frameworks? Explore our eight-week course Economics for Managers and other online strategy courses, and learn more about how to develop effective pricing strategies.

This article was updated on October 19, 2021. It was originally published on November 3, 2020.

About the Author

Tim Stobierski is a marketing specialist and contributing writer for Harvard Business School Online.
 
All FAQs

Top FAQs

How are HBS Online courses delivered?

+–

We offer self-paced programs (with weekly deadlines) on the HBS Online course platform.

Our platform features short, highly produced videos of HBS faculty and guest business experts, interactive graphs and exercises, cold calls to keep you engaged, and opportunities to contribute to a vibrant online community.

Do I need to come to campus to participate in HBS Online programs?

+–

No, all of our programs are 100 percent online, and available to participants regardless of their location.

How do I enroll in a course?

+–

All programs require the completion of a brief application. The applications vary slightly from program to program, but all ask for some personal background information. You can apply for and enroll in programs here. If you are new to HBS Online, you will be required to set up an account before starting an application for the program of your choice.

Our easy online application is free, and no special documentation is required. All applicants must be at least 18 years of age, proficient in English, and committed to learning and engaging with fellow participants throughout the program.

After submitting your application, you should receive an email confirmation from HBS Online. If you do not receive this email, please check your junk email folders and double-check your account to make sure the application was successfully submitted.

Updates to your application and enrollment status will be shown on your Dashboard. We confirm enrollment eligibility within one week of your application.

Does Harvard Business School Online offer an online MBA?

+–

No, Harvard Business School Online offers business certificate programs.

What are my payment options?

+–

We accept payments via credit card, Western Union, and (when available) bank loan. Some candidates may qualify for scholarships or financial aid, which will be credited against the Program Fee once eligibility is determined. Please refer to the Payment & Financial Aid page for further information.

We also allow you to split your payment across 2 separate credit card transactions or send a payment link email to another person on your behalf. If splitting your payment into 2 transactions, a minimum payment of $350 is required for the first transaction.

In all cases, net Program Fees must be paid in full (in US Dollars) to complete registration.

What are the policies for refunds and deferrals?

+–

After enrolling in a program, you may request a withdrawal with refund (minus a $100 nonrefundable enrollment fee) up until 24 hours after the start of your program. Please review the Program Policies page for more details on refunds and deferrals. If your employer has contracted with HBS Online for participation in a program, or if you elect to enroll in the undergraduate credit option of the Credential of Readiness (CORe) program, note that policies for these options may differ.

 

Sign up for News & Announcements

Subject Areas

  • Business Essentials
  • Leadership & Management
  • Entrepreneurship & Innovation
  • Strategy
  • Finance & Accounting
  • Business & Society

Quick Links

  • FAQs
  • Contact Us
  • Request Info
  • Apply Now

About

  • About Us
  • Media Coverage
  • Founding Donors
  • Leadership Team
  • Careers @ HBS Online

Legal

  • Legal
  • Policies
Harvard Business School
Copyright © President & Fellows of Harvard College
  • Site Map
  • Trademark Notice
  • Digital Accessibility