What Is Customer-Based Pricing?

By Thomas Bennett Financial expert at Priceva
Published on April 24, 2023
As the world becomes more connected and technology advances, businesses must constantly find ways to stand out in the crowded marketplace. One way that companies can differentiate themselves is through customer-based pricing, a strategy that tailors pricing to the specific needs and characteristics of individual customers. In this article, we'll explore how customer-based pricing works, including its benefits, different types of consumer pricing strategies, and how this approach has evolved in the age of e-commerce.

Customer-Based Pricing: How It Works

Customer-based pricing is a pricing strategy that sets the price of a product or service based on the perceived value of that product or service to a specific customer segment. This strategy involves analyzing customer data to identify customer needs and preferences and using this information to create a pricing strategy that is tailored to those customers.

To implement this strategy, businesses typically follow three main steps: segmentation, targeting, and positioning. First, they segment their customer base into groups based on similar needs and preferences. Then, they target a specific customer segment that they want to serve. Finally, they position their product or service as offering unique value to that target customer segment, and set the price accordingly.

Customer-based pricing can help businesses improve customer satisfaction, profitability, and market positioning by offering tailored products and services that meet the specific needs and preferences of their target customers. This approach can lead to increased customer lifetime value and positive word-of-mouth referrals, making it an attractive pricing strategy for businesses looking to grow their customer base.

Customer-Based Pricing Strategy Advantages

Customer-driven pricing is a strategic approach for companies looking to enhance their marketing and pricing strategies. It allows them to cover production costs, attract customers, and establish product value. Let's delve deeper into the advantages.

Production cost coverage

A customer-driven pricing strategy can help to cover production costs by setting prices based on the perceived value of a product or service to a particular customer segment. This approach allows businesses to generate revenue that covers the costs of producing and delivering their products or services. By setting prices that reflect the perceived value of their offerings, businesses can capture more value from their customers and increase their profitability.

Customer appeal

Customer-driven pricing is designed to deliver products and services that meet the specific needs and preferences of a targeted customer segment. By offering products and services that are tailored to these customers, businesses can increase customer satisfaction. When customers believe they are getting a good deal or a fair price for what they are receiving, they are more likely to make a purchase and become loyal customers.

Product value definition

A customer-driven pricing strategy can help businesses define the value of their product by adjusting it to customer needs. Companies can highlight key features and benefits, and consequently set prices that reflect customers’ willingness to pay. By using this approach, businesses can create more valuable products that meet the specific needs of their target market and set prices that reflect this increased value.

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Pricing Strategies

Pricing is critical for any business strategy, and choosing the right pricing strategy can have a significant impact on a company's success. There are various types of strategies that businesses can use to set prices, which include cost-based pricing, competition-based pricing, value-based pricing, and price skimming. Each pricing strategy has its advantages and disadvantages, and you need to carefully consider which one is best for your product or service to maximize revenue, profitability, and customer satisfaction.

Cost-based pricing strategy

This strategy means setting a product’s price based on its production or acquisition costs. This approach requires businesses to determine the total cost of production or delivering a service, including direct costs such as materials, labor, and overhead, and then add a markup to cover profit and other expenses. Cost-based pricing is a straightforward method of pricing, as it ensures that a business will at least break even on each sale. However, it does not account for factors such as competition, consumer demand, and perceived value, which can impact a product's price on the market.

Competition-based pricing strategy

Competition-based pricing is a strategy in which businesses set their prices based on the prices of their competitors. This pricing strategy involves charging a price that is equal to or lower than the price charged by competitors in the same market. The primary goal of such a pricing strategy is to stay competitive and gain market share, especially in a crowded market with many competitors. However, this strategy has its drawbacks, as it can lead to price wars and lower profit margins.

Value-based pricing strategy

Value-based pricing is a pricing strategy that involves setting the price of a product based on the perceived value it provides to the customer. This approach requires businesses to understand the customer's needs, preferences, and willingness to pay for the product or service. By considering these factors, businesses can set a price that reflects the value of the offering to the customer. Value-based pricing can be a powerful way to capture the maximum value from a product or service, as customers are willing to pay more for offerings that they perceive as being of high quality or that meet their specific needs. However, it requires a deep understanding of the market and the customers, as well as the ability to effectively communicate the value of the offering.

Price skimming strategy

Price skimming involves setting a high initial price and then gradually lowering it over time. This approach is often used for innovative or high-tech products that have a limited initial market, as it allows businesses to capture maximum profit from early adopters who are willing to pay a premium for new technology. As demand for the product increases and competition enters the market, the price is gradually lowered to attract a broader customer base. While price skimming can be an effective strategy to generate early profits, it can also alienate price-sensitive customers and make it difficult to maintain market share as competitors enter the market with lower-priced offerings.

Challenges of Customer-Based Pricing for Digital Commerce

Customer-based pricing has become increasingly popular in the age of e-commerce. With the ability to collect and analyze vast amounts of customer data, businesses are able to adjust their prices to the specific needs and preferences of their customers. By tailoring their prices, e-commerce companies can increase customer satisfaction, loyalty, and, ultimately, sales.

However, this pricing strategy also raises concerns about fairness and transparency. Before, businesses had more freedom to adjust prices because information was less accessible than it is now. Therefore, customers may feel like they are being treated differently based on their personal data, which can lead to a loss of trust in the company. E-commerce companies must strike a balance between personalization and transparency to ensure that their customer-based pricing strategies are both effective and ethical.


Customer-based pricing is a pricing strategy that considers the specific needs and preferences of a company's customers. Instead of solely basing prices on production costs or industry standards, customer-based pricing seeks to set prices based on how much the customer values the product or service.

To implement this pricing model effectively, companies must have a thorough understanding of their target market, including their purchasing habits, demographics, and preferences. Using dynamic pricing software like Priceva can facilitate the adjustment of prices for any e-commerce market and product segment.

By adjusting their pricing strategies to meet the needs and expectations of their customers, companies can improve customer satisfaction and build stronger relationships with their clients. Priceva's Dynamic Pricing Software automates competitive pricing analysis and price optimization for each SKU or product category, making it an ideal solution for the e-commerce era, allowing complete control over any pricing strategy.


Why is customer-based pricing good?

Customer-based pricing is a good pricing strategy because it allows businesses to tailor prices to the specific needs and preferences of their customers. This can increase customer satisfaction, loyalty, and retention, leading to long-term profitability and success.

Why is value-based pricing better than cost-based pricing?

The main reason why value-based pricing is better than cost-based pricing is that it focuses on the perceived value that a product or service provides to customers rather than just the cost of production.

What is the difference between cost-based and value-based pricing?

Specifically, cost-based pricing sets prices based on the cost of production, while value-based pricing sets prices based on the perceived value of a product or service.

Empower Your Business with Priceva's Price Tracking Solution
Take charge of your pricing strategy with Priceva's powerful price tracking tools.
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