We propose a perceptual video coding framework based on an SSIM-inspired divisive normalization scheme as an attempt to transform the DCT domain frame prediction residuals to a perceptually uniform space before coding. Based on the residual divisive normalization process, we define a distortion model for mode selection and show that such a divisive normalization strategy largely simplifies the subsequent perceptual rate-distortion optimization procedure. Experiments demonstrate that the proposed scheme can achieve significant gain in terms of rate-SSIM performance in comparison with H.264/AVC.