Good, Better, Best: Rethinking Wages as a Pricing Tool

In pricing, we usually talk about three common pricing approaches:

• Cost-plus pricing
• Competitive or market pricing
• Value-based pricing

I tend to think of these in a “good, better, best” framework. Cost-plus is good, competitive pricing is better, and value-based pricing is best. Of course, it depends on your product and market segment, but the hierarchy holds up pretty well.

Now here’s the twist: we rarely apply this thinking to wages. Who sets wages in a company? Typically HR — and HR typically does this with the tools they have: market surveys, internal equity, and budget constraints. Their goal is consistency and fairness. But at the end of the day, they’re still pricing labor. 

If labor is a product, why not bring pricing expertise into the conversation?

Do we treat wages with the same rigor we use for products? I’d argue pricing analysts should be the ones analyzing wage data and giving some additional guidance. After all, labor is a product too.

Cost-Plus Wages: Cheap Labor, Cheap Results

When HR leans on cost-plus logic, they’re essentially saying: let’s get the cheapest labor possible. We all know what cost-plus products look like — think dollar stores or Walmart’s lowest-price items. They’re cheap, but quality suffers. Apply that to labor, and you get the same outcome: low wages, low quality, high turnover.

Competitive Wages: The Market Middle

Most companies aim for competitive wages. They benchmark against the market, set ranges, and try to land somewhere in the middle. It’s safe, it’s predictable, and it keeps them “in line” with what other firms are paying. But it’s still reactive — wages are pegged to what’s out there, not to the actual value an employee creates.

Value-Based Wages: Pay for Impact

Here’s where things get interesting. Value-based pricing is the gold standard for products, and I think it should be the gold standard for wages too. Employees should be paid based on the value they bring to the company.

That value can take different forms:

• Increasing revenue
• Decreasing costs
• Reducing risk

You can forecast these impacts just like you would with a product. Sure, there are trade-offs — someone might increase revenue but also increase risk — but that’s part of the analysis. The point is: wages should reflect measurable value, not just cost or market averages.

Beyond the Role: Paying for Created Value

There’s another layer here. Employees shouldn’t be paid simply for existing in a role — that’s wasteful. They should be rewarded for creating value, even beyond their job description.

Think of employees who:

• Generate new ideas
• Build products that move the business forward
• Solve problems creatively

That’s value creation. But here’s the catch: if companies are paying cost-plus or competitive wages, employees have no obligation to go above and beyond. It’s bad form to expect value-based behavior without value-based pay.

Flip the Script

If we flipped the script and paid wages based on value, I think we’d see a major shift in how employees and employers interact. Employees would be incentivized to create real impact, and companies would stop wasting money on “existence wages.”

Labor is a product. Wages are its price. Let’s stop pretending otherwise and start pricing it the same way we price everything else: good, better, best — with value at the top.