EXECUTIVE SUMMARY:
Most leaders think of pricing as a matter of costs and margins, but this overlooks the customer’s perception of value. The Value-Price-Cost (VPC) Model reframes pricing as a ladder: cost at the bottom, price in the middle, and perceived value at the top. Profitability comes from keeping price above cost, but sustainable growth comes from raising perceived value. By investing in brand and marketing, businesses can create goodwill, loyalty, and repeat purchases. This turns pricing into both a financial and strategic advantage.
How much should you charge for your products or services? Pricing isn’t just about covering costs or copying competitors. In a previous article, we explored Veblen Goods, where higher prices can actually increase demand. That dynamic is one piece of the puzzle. For most businesses, the better question is: How do you set a price that balances cost, profit, and customer perception? That’s where the Value-Price-Cost (VPC) Model comes in.
What is the VPC Model?
Think of the VPC Model as a ladder with moveable rungs. At the bottom sits your cost of goods sold. In the middle is the price you charge. At the top is the customer’s perceived value. For a purchase to happen, the perceived value must be higher than the price. Otherwise, customers will not buy. Your profit margin, how much you make per sale, is the difference between the price and your cost of goods sold.
But what exactly makes up “value,” and how can you increase it?
The value of a product to a customer can be thought of as the sum of three parts:
The tangible utility of the product (what it does for the customer)
The intangible brand (how the customer feels about buying from you)
The intangible marketing (how you frame and communicate the product)
An Example on Perceived Value: Nike
Imagine someone preparing for a marathon. They need a pair of running shoes and might be willing to pay $50 for the basic utility of a reliable shoe. That price reflects the functional value: the ability to run miles comfortably.
This should, in theory, be the maximum they are willing to pay. But now imagine the shoe is made by iconic shoe brand Nike. Even if the design is identical to a no-name brand, the customer prefers Nike. They trust the quality control, expect reliable customer service if anything goes wrong, and feel a sense of empowerment when wearing the brand. That emotional connection represents brand value. In this case, let’s say it adds another $25.
Finally, the shoe is marketed as a marathon-running shoe. The company provides five clear reasons why this model is perfect for long-distance running. This positioning gives the customer confidence, inspiration, and the sense that they are making the right choice. That adds another $25 in perceived value.
Now, although the shoe’s functional utility was only worth $50, the combined utility, brand, and marketing bring the customer’s perceived value to $100.
Thus, if the shoe costs Nike $40 to produce, they should charge $100, right? Not always. Customers do not all perceive value the same way. Some may value the shoe at $90, others at $81. A company also has to consider customer satisfaction and long-term loyalty.
If Nike prices the shoe at $80, both sides win. The company earns $40 in profit, and the customer feels they are getting $20 more in value than they paid. This creates goodwill and repeat business.
Tips to Increase Perceived Value
Branding and marketing increase the perceived value of your products without changing the actual product itself. This has two effects. First, it can convert people who previously would not have purchased. Second, it allows you to increase your prices while maintaining or even improving customer satisfaction.
So how do you raise the top of the ladder and increase customer-perceived value? Here are proven tactics:
Signal quality through consistency: A polished, consistent brand identity builds confidence. Apple demonstrates this through its minimalist design, sleek packaging, and seamless experience.
Build emotional resonance: Align with a lifestyle, stand for values, or evoke aspiration and belonging.
Establish trust and reduce risk: Use familiarity, such as with brand impressions, and risk-free guarantees, such as with return windows and warranties, to show you stand behind your product.
Differentiate beyond features: A brand personality creates feelings that go deeper than functionality. Liquid Death, for example, sells water but creates a rebellious identity.
Create status for luxury: Prestige brands like Rolex, Hermès, and Lexus succeed by offering exclusivity, scarcity, and status.
Reinforce value at every touchpoint: From website design to packaging, onboarding emails, and customer support, every interaction should add to the customer’s perception of value.
Wrapping It All Up
The Value-Price-Cost Model shows that building a successful business is about more than costs and pricing. The real opportunity lies in raising perceived value through strong branding and thoughtful marketing. When customers believe they are getting more than they paid for, they return, stay loyal, and often become advocates. That is the foundation of lasting profitability and growth.
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