The objectives of this research were to: 1) investigate the milk pricing methods in different countries and compare it with the milk pricing system in Iran, 2) estimate the effect of milk quality on the efficiency of dairy products as well as 3) propose a quality-based milk pricing system suitable for Iran circumstances. To do that, quantitative and qualitative characteristics of raw milk, dairy products and economic data related to the price of dairy products and the processing costs were collected through a questionnaire as well as consultation with dairy industry experts. The results showed that the efficiency of dairy products increased by milk quality improvement. So that in one metric ton, efficiency of cheese yield increased by 17.48 kg and 14.66 kg as raw milk fat and protein percentages increased by one unit percent, respectively. Estimated the efficiency using regression coefficients of skimmed milk powder on solid not fat, whole milk powder o total solid, and butter on milk fat percentage were 8.0, 7.5 and 12.1 kg per ton of raw milk, respectively (P 0.0001). Ignoring milk protein, somatic cell count and temperature as well as occasional and inappropriate payment for milk fat and total bacterial count along with low base levels for standard milk fat (3.2) and protein (3.0) percentages comparing with international averages ( 3.8 % fat and 3.3% protein) were the main drawbacks of Iran current milk payment system. On the base of information in 2016, base milk price was IRR 12500, while milk with highest and lowest quality had just a difference of IRR 1775. Under proposed milk payment system and according to the reference commodity products (local cheese, skimmed milk powder, cream and drinking milk), economic values for fat and protein percentages were estimated to be IRR 2741 and 1311, respectively whereas base milk price was IRR 12704 and the difference between high and low quality milk was estimated to be IRR 3875. Comparison of raw milk price fluctuations in the current pricing and multi-component pricing method showed that the current pricing method does not have much value for milk quality. In current pricing the difference in the value of the highest quality and the lowest quality is only 1755 IRR (11945 IRR per kg of milk with 2.83% fat compared to 13700 IRR per 1 kg of milk with 4% fat). But in the multi-component pricing method this difference is 3875 IRR. Since in the current pricing method the revenues of producers depend on the volume of production they encourage them to increase the volume of milk. Instead in the multi-component pricing method the distribution of producers income is made according to the fat and protein milk. The multi-component pricing method is applicable in countries where protein products (natural cheeses and milk protein concentrates) are valuable. The results of this research can be useful for dairy producers and processors to better interact under the demand of consumers. Keywords : milk quality, efficacy of dairy production, multi-component pricing