What is Value Based Pricing? Why You ... - Price Intelligently

Value based pricing models and software utilize customer data, as well as breakdowns of the relative value of different features within your ... Wejustlaunchedengagementdata! product blog Guides SubscriptionStatistics ReducingChurn PricingOptimization FreemiumStrategy Shows PricingPageTeardown ProfitWellReport ProtecttheHustle Tradeoffs RecurNow aboutus Login MostRecent PricingPageTeardown recurnow profitwellreport protectthehustle AllBlogPosts   WhatisValueBasedPricing?WhyYouNeedValueBasedPricing PatrickCampbell Follow@patticus UpdatedOn:September07,2021 No Pleasenote:Thispostisthethirdpostinafivepartseriesonthemainpricingmethodologies,highlightingtheprosandconsofeach.Checkoutthefirstpostoncostpluspricingandsecondpostoncompetitorbasedpricing. We’rebeginningeveryoneofthesepostswiththesamestatement:“Pricingisthemostimportantaspectofyourbusiness.”Nootherleverhasahigherimpactonimprovingprofits.Weelaboratedonthisassertioninapreviouspricingstrategypost,butrealizethata1%improvementinpriceoptimizationresultsinanaverageboostof11.1%inprofits.That’snosmallchange. Valuebasedpricingisthepinnacleofpricingifyoucanfigureouthowtogetthere(moreonthisbelow).Rememberwhatwesaidlasttime,pricingisaprocessthatutilizesdatatoeliminateasmuchdoubtaspossibleforkeystakeholderstomakeaprofitmaximizingdecision.Themetaphorwe’vebeenusing(someofyoulikeit,someofyoudon’t)isadartboardwhereyou’retryingtohitabullseyewiththeperfectprice,butthere’sallthatextraspace“distracting”yourdart.Dataandthesemethodologieseliminatethatspace,guidingyourdarttotheidealpricepoint. We’vealreadylearnedthatcostpluspricingandcompetitorbasedpricingcanbeuseful,butthey’refairlyweakoverall,especiallyintheSaaSorsoftwarespace.Fortunately,valuebasedpricing,whendonecorrectly,providesvaluabledatatoshrinkthatdartboarddowntremendously.Yet,likeallmethodologies,ithassomequirks. Tounderstandvaluebasedpricing,let'stakealookatwhatvaluebasedpricingentails,uncoverthemethodology'sprosandcons,beforeexploringwhoshouldandshouldn'tutilizevaluebasedpricing. Valuebasedpricing:It'sallaboutthecustomer(andthebenjamins) Toconsumers,priceisanumericalevaluationofhowmuchtheyvaluewhatyouareselling.Forexample,ifIneededanewwinterhat,IcouldgetonefromthelocalGoodWillstoreforadollarorIcouldgotoMacy’sandbuyonefor$25.IfIonlycaredaboutcoveringmyhead,Goodwillwouldwin,butsinceIcareaboutmyfashionsense,Macy’swins.MywillingngesstopayiscontingentuponthevalueIplaceintotheproductIwantandneed,whichdependsonhundredsofdifferentaspectsofmypsycheandsituation.Essentially,valuebasedpricingcutsthroughtheredtapeofthisscenariotodeterminethetruewillingnesstopayofatargetcustomerforaparticularproduct. Unfortunately,themostcommonpricingstrategiesandmethodologiesforgetaboutthecustomer.Instead,peopleinchargeofpricingjustifypricepointsbasedoninternalreasonsorsimplyadoptingexistingmarketprices.Newsflash:customersdon’tcarehowmuchsomethingcostyoutomakeoryourcompetitors,theycarehowmuchvaluethey’rereceivingataparticularprice. Valuebasedpricingrequiresalotofresearch,whichisrightuptherewithworkingovertimewhileyourfriendsareatthebar(orjustbringtheworktothebar). However,unlikecostplusandcompetitorbasedpricing,itisimpossibletofabricateanumberthatcorrectlyreflectshowconsumersfeel.Plus,unlikepricingdonebymarketnorms,thismethodfocusesonisolatingqualitiesthatdistinguishtheproductinquestionfromthe85looka-likesonthemarket. Valuebasedpricingmodelsandsoftwareutilizecustomerdata,aswellasbreakdownsoftherelativevalueofdifferentfeatureswithinyouroffering.You’llalsoneedtoconductananalysisofcompetinggoods,becauseonceyouhavethedata,you’llwanttoknowtheotheroptionsconsumershaveopentothem.Intheendthough,youhavethegreatestamountofdatatomakeaninformeddecisionaboutyourprofitmaximizingprice(unlessyou’reinamarketbasedpricingsituation,whichwilltalkmoreabouttomorrow).Thus,shrinkingdownthedartboard. Prosofvaluebasedpricing 1.Itprovidesrealwillingnesstopaydata. Mostcompaniesshyawayfromdivingintopricing,becausethey’reafraidoftheprocessandenduprushingtosolveotherproblemsfacingthebusiness,becausetheyatleastknowhowtotestdifferentlandingpages.Yet,eventhoughthere’sworkinvolved,valuebasedpricingprovidesrealdatathatforcesyouintoaprofitgeneratingpricewithinyourpricingstrategy. Simplyput,ifdonecorrectly,valuebasedpricinghelpsyougeneratethemostprofit. 2.Ithelpsyoudevelophigherqualityproducts. Valuebasedpricingnotonlydeterminesamoreaccuratepricefortheendproduct,buttheprocesswillalsobenefityourbusiness.Theheavyemphasisonresearchislikesweatingonatreadmill;notonlydoyouburnoffthoseappletinis(don’tthinkourCEO,Patrick,doesn’tdrinkthem),butyouarealsohealthier. Exploringyourcompetitionwillhelpyouunderstandtheadvantagesofyourproduct,whichiswheremarketingshouldfocuson,anditsdisadvantages,thepartsthatshouldbealtered.Takingonaconsumerperspectivewillalsohelpyoudiscoverwhatclientsarereallylookingforinyoursolution.Productsandfeatureswillbedrivenbyconsumerdemand,whichraisesperceivedvalue,therebyresultinginahigherprice. 3.Itallowsyoutoprovidephenomenalcustomerservice. Muchofthecustomerdatainvaluebasedpricingiscollectedthroughcustomersurveysorinterviews.Theresponseswe’veseentosimplybringingcustomersintothediscussionofvaluehavebeenextraordinarilypositiveandappreciated. Thisattentiontoconsumeropinionsandwantswillresultinmorepersonableandconsiderateservices.Thiscanbethedifferencebetweenonetimecustomersandloyalclientswhodevelopabondwiththecompanyandalwayscomeback,becausetheytrustyou’reprovidingthevalueyoucontinuetoclaimyouareinyourprice. Consofvaluebasedpricing 1.Ittakestimeandresources. Themethodcanbesimplifiedandquickened,butit’snotnecessarilyasquickasGooglingyourcompetitorsorcalculatingyourcostsandpullingamarginnumberoutofthinair.Youcanalsobeabitintimidatedbythemethod,becausepricingisn’tsomethingtheyteachusBusinesses101. Forthisreason,manybusinessesshyawayfromthemostimportantaspectoftheirbusiness(Funfact:Inbusinessschooltheytellyouhowimportantpricingistoprofit,buttheynevertellyouhowtooptimizepricing.).Businessesalsothinkonlyextremelylargeandwealthybusinessescanaffordtodothingsthisway.However,thereareinfactwaystofindperceivedvaluewithoutbreakingthebank. 2.It’sascience,justnotanexactscience. Thesecretisout:Unlessyou’redealingwithaverysaturatedproductwheremarketbasedpricingworks,thereisnosilverbulletforpricing.Thus,valuebasedpricingismoreofaprocessthatrequiresconsistentdedication,notjusta“setitandforgetit”mentality. Thinkaboutit,willingnesstopaydiffersbetweendifferentcustomerpersonas,regions,andevenoffer.A100%accuratepredictionisimpossible,butwecangetprettydarnclose. Summary:Valuebasedpricingshouldbeapartofalmosteveryone’spricingstrategy,butyoushouldn’tshyawayfromothermethodologies Tosummarize,almosteveryoneinthesoftwareandSaaSspacewillbenefitfromvaluebasedpricing.Evenindividualsoutsideofthisspace(retail,media,etc.)wouldbenefitfromthemethodology,becauseevenwithstaunchcompetitionyoucandeterminethevalueofprofitmaximizing,differentiatedfeaturesforyourproduct.Thinkabouttoiletpaper.Itotallypaymoreforquiltedsheets. Rememberthough,valuebasedpricingtakesdedication.Yet,whendoneright,providesenormousbenefitsintermsofmoreprofit,betterandmorecompetitiveproducts,andcustomerorientedmarketinganddevelopment. Tolearnmore,checkoutourPricingStrategyebook,ourPricingPageBootcamp(it’sfree!),orlearnmoreaboutourpriceoptimizationsoftware.Also,checkbacktomorrowtolearnmoreaboutmarketbasedpricing. 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