Why a Value Based Pricing Strategy Works Best for SaaS

Value-based pricing is a strategy that involves basing your prices on how the customer perceives the value of your product or service. Rather ... WhyaValueBasedPricingStrategyWorksBestforSaaS PatrickCampbell Jan72020 Everybusinessthatsellssometypeofproductorservicehasapricingmethod.Pricingmethodsarewaysofcalculatingthepriceofgoodsandservicesbytakingintoaccountallthefactorsthatcaninfluencepricingstrategy.  Therearefourpopularpricingmethods:cost-pluspricing,competitor-basedpricing,demand-basedpricingandvalue-basedpricing.Ofthesefouroptions,value-basedpricingisthebestoption,foryourbusiness.  So,let’sgetintowhatvalue-basedpricingis,whyit’ssogreat,andsomestellarexamplesofit.    TableofContents:1.Whatisvalue-basedpricing?2.WhyProfitWelllovesvalue-basedpricing3.Whoisvalue-basedpricingfor?4.Thebenefitsofvalue-basedpricing5.Thedownsideofvalue-basedpricing6.2toppricingstrategiescomparedwithvalue-basedpricing7.Examplesofvalue-basedpricing8.Howtocalculate&implementvalue-basedpricing9.DoesProfitWellrecommendvalue-basedpricing? Whatisvalue-basedpricing? Value-basedpricingcouldeasilybecalled“customer-basedpricing”becausethat’sessentiallywhatitis.Themoreformaldefinitiondescribesvalue-basedpricingasbasingaproductorservice’spriceonhowmuchthetargetconsumersbelieveit’sworth.Insteadoflookinginwardlyatyourcompanyorlaterallytowardcompetitors,value-basedpricinggivesyouanoutwardlook.     WhyProfitWelllovesvalue-basedpricing Welovevalue-basedpricinghereatProfitWell,andforthreegoodreasons.Youcanpricehigherthanyourcompetitorsbecauseyou’rebasingthepricingoffofthecustomer'sperceivedvalue,orwhatcustomerssaythey’rewillingtopay.Ifthey’rewillingtopayhigherthanwhatyourcompetitorischarging,thenthatmeansmoremoneyinyourpocket.  Value-basedpricingalsomakesimprovingyourproductacontinualprocess.Pricingismorethanjustadollarsignonyourwebsite.Itincludespackagingandhowyouofferfeatures.Knowingwhatyourcustomersvalueatalltimeswillmakeevolvingyourproductandfeaturesanabsolutemust. Finally,sinceyourcustomersaredeterminingproductvalue,youneedtocommunicatewiththemquiteabit.Thisconstantcommunicationbuildsgreatcompany/customerrapport.You’rebuildingtrustandthistrustcanleadtogoodthingsdowntheroad,likehigherretentionandlesschurn.    Whoisvalue-basedpricingfor? Value-basedpricingisthebestoptionforeverycompanythathasthetimeandresourcestoexecuteitproperly.It’sthemostrepresentativepricingpossible.ForSaaS,value-basedpricingistrulytheonlyviableoption.However,differentformsofbusinessesmayuseotherpricingmethods.Forexample,agasstationismorelikelytoimplementacost-pluspricingmethod,whichisthemostbasicformofpricing(sellingsomethingformorethanitcoststomake).    Thebenefitsofvalue-basedpricing I’vespokenveryhighlyofvalue-basedpricing,soIthinkit’stimeIbreakdownspecificbenefitsthatcomewiththispricingmethod.    Higherpricepointrightoffthebat Ifyouhaveshownthereisahighwillingnesstopayamongyourcustomers,youcanstartatahigherpricepoint.Then,asyoucontinuallyaddvaluetoyourproductandcreateadditionalfeatures,youcanadjustpricesaccordingly.Ifyouweretoimplementacompetitor-basedpricingmethod,you’dbeduplicatingwhatyourcompetitionisdoing.Whatiftheydidn’tconductproperresearchandarelowballingtheirpricing?Ifyouduplicatetheirprices,youcouldbemissingoutonrevenue.Youcanmakethemostmoneybygoingoffthesourceofyourrevenue:thecustomer.Additionally,asyourcompanyandproductofferingsevolve,youshouldbere-evaluatingyourpricingstrategyeverysixmonths.    Provesrealwillingnesstopaydata Collectingwillingness-to-paydatarequiressomeseriouselbowgrease,butit’sworththework.Again,willingnesstopayisthemaximumamountacustomeriswillingtopayforyourproductorservice.Itvariesbasedonanumberoffactorsbutisoneofthebestwaystoconceptualizeoveralldemandatanygiventime.Theresearchbehindavalue-basedpricingstrategyprovidesrealdatathatforcesyouintoaprofitgeneratingprice.  Knowingwhatyourcustomersarewillingtopayforyourproductorserviceisessentialinbuildinganeffectiveandcompetitivepricingstrategy.Withoutit,you’rejustguessing.    Helpsyoudevelophigherqualityproducts Takingaconsumerperspectivewillhelpyoudiscoverwhatsolutionspeoplewanttofindwithinyourproductsandfeatures.Throughthisperspective,you’llgeneratenewideasonhowtocontinueprogressingyourproducts.Progressingyourproductsmeansfindingnewwaystoimprovewhat’salreadybeenbuiltandwhereyoucanadd.Offeringsupplementaryfeatureswillboostrevenueandgivecustomersamoredynamicexperiencewithyourservice.     Increasedfocusoncustomerservice Thecustomertakescenter-stagewithvalue-basedpricing.Mostcustomerdatausedforvalue-basedpricingiscollectedthroughcustomerfeedback,surveys,andinterviews.Thisattentiongiventotheconsumerwillalsolikelystrengthentherelationshipswithyourcurrentcustomers.You’llbemoreattentivetotheirneedsandtheywillappreciateyourdiligenceinhelpingthem.Thisbuildsrapportthatwillincreaseretentionandthreatenchurn.    Thedownsideofvalue-basedpricing Likeeverythinginlife,value-basedpricingisn’tflawless.I’llgothroughsomereasonswhyvalue-basedpricingmightnotbethebestoptionforyourightnow.   Itrequiresampletimeandresources Toadoptavalue-basedpricingstrategymeansyouneedtobededicatedtoit.Buildingthebasisforquantifyingyourbuyerpersonasistimeconsuming.Figuringoutcustomervaluationsismoredifficultthanitsounds,whichiswhysomanycompaniesoptforcost-plusandcompetitor-basedpricing.Customerresearchiscontinual.Soonceyouadoptonepricingstrategy,youusetheinformationtobuildandevolveuponit,meaningtheworkisnevertrulydone.Thistypeofgritisnotforeveryone.    It’snotexact Value-basedpricingisn’tahardnumber;it’sanapproximation.It’snot100%reliablebecausepricesensitivitymeasurementsandfeatureanalysisonlygiveyouapproximationsoftherightpricing,packaging,andpositioningforyourproduct.    2toppricingstrategiescomparedwithvalue-basedpricing Let'swalkthroughthetwoothercommonstrategiesusedtodefinetheirpricingprocess:cost-plusandcompetitor-based.We'llthenshowyoutheproblemswiththesetwostrategiesandhowtheydon’tholdupwhencomparedtovalue-basedpricing.    Cost-PlusPricing Apricingmethodinwhichthesellingpriceissetbyevaluatingallvariablecostsacompanyincursandaddingamarkuppercentagetoestablishtheprice. Cost-pluspricingstrategyiswhatpeopleautomaticallythinkofwhentheythinkof“pricingstrategy.”  Thisisthemostbasicformofpricing:sellingsomethingformorethanitcoststomake.Youaddupallofthecostsofprovidingtheserviceandthenaddaprofitmarginontoptorepresentthevalueyouaregivingyourcustomers.InSaaS,thecostsmightbeproductdevelopmentanddesign,thecompaniesownSaaSproviders,andthecostsoftheteam.Thenadda5%,10%,orhealthy20%marginontopforprofit. Implementingcost-pluspricinghastwomainbenefits: It’ssimple.Aslongasyouknowhowmuchyourcostsare,it’strivialtoworkoutyourprice.Nomarketresearch,nodataanalysis,nostrategizing.Justsomeadditionandpercentages. Youwillcoveryourcosts.Asthisiscost-pluspricing,youknowthatyouwillbeaddingacertainmarginontopofyourcostsaspureprofit. Takingthoseadvantagesatfacevalue,cost-pluspricingseemslikeagreatideaandcertainlyagoodstartingpoint,withlittleoverheadanddefiniteprofits. Yet,cost-pluspricingisanythingbutasurewin.Youwon’tnecessarilyknowallyourcosts,andthereforecan’tknowifyou’regoingtocoveryourcosts.Yourinitialcostsmightincludeonlyhostingandsomedevelopment,butasyougrowyou’llhavetofactorinsales,marketing,andanumberofotherpreviouslyunknowncosts.Youcan’tchangeyourpricestoaccountforeverynewhire,whichmeansyourprofitswilltakeahit. Also,costsfluctuateovertime.IfaSaaSproviderisusingvalue-basedpricingandhaschangedtheirprices,youcan’tconstantlychangethepriceofyourproducttomaintainthesamemargin.Thatmightworkalowcostproduct,orvenueslikeagasstation,butitwon’tworkforaSaaScompany.Again,profitstakeahit. Thisiswhathappenswhenyouusecost-pluspricing: Inthisexample,thecompanycalculatescosts,andthenaddsahealthy15%marginontop.Thisworkswellforafewmonths,untilsomeunexpectedcostscropup.Thenthemarginiscutto5%andthen0%,wherethecompanyisonlybreakingeven.ThenallittakesisforoneoftheirownSaaSsupplierstoraisepricesandtheyarelosingmoneyoneverysale.   TheBigProblemWithCost-PlusPricing: Customersdon’tcareaboutcost,theycareaboutvalue. YouhavenoideahowmuchitcostsforStarbuckstomakeyourFrappuccino.YouhavenoideahowmuchitcostsforHondatomakeyourAccord.Thepriceoftheseitemsistiedtothevaluetheyrepresenttoyou,nottheirinternalcost.Sure,StarbucksandHondaarepricingtheirproductsoverwhatitcoststomakethem,otherwisethey’dbeintrouble,buthowmuchoverisnotdeterminedbythecostoftheproduct(coffeebeansortheengineparts). ForSaaSinparticular,theunitcostofdeliveringoneaccountcanbeverylow.Itisthevaluethatyourcustomerswillgetoutofusingyourproductthatreallymatterstothem,nothowmuchyoupaidyourdevelopers.   Competitor-BasedPricing Apricingapproachthatutilizescompetitorpricesasabenchmark,ratherthansettingapricebasedoncompanycostsorcustomervalue. ForaSaaScompanystartingoutinanewindustry,competitor-basedpricingstrategywillseemthelogicalwaytogo.Unsureoftheinitialvalueofyourproduct,andnotwantingtogotoohighortoolow,itseemsobviousthatyoushouldlookattheothercompaniessellingsimilarproductstodecideyourownpricepoint. Again,calculatingpricefromcompetitorshastwomainbonuses: Simplicity.Byspending30minutesoncompetitors’sitesfindingalltheirpricinginformationyoucanhavea“pricingstrategy.”It’salsounlikelytogowrong.Byplacingyourselfinthemiddleofthepack,you’llbeanchoringyourselfforanyfuturecustomersandtheywon’tthinkyourproductistoocheaportooexpensive. Itmightbeclose.Ifyou’reinacompetitivemarket,pricingforthecompaniesinvolvedshouldbeclosetowhatthemarketcanreasonablysustain. Butthebiggestdownsideofcompetitor-basedpricingshouldbeobvious.Youdon’thaveyourpricingstrategy,youhavetheirpricingstrategy.Yourcompanyexiststooffercustomerssomethingdifferenttowhatisalreadyonthemarket.Youareofferingmorevalueandabetterproduct,otherwiseyoushouldn’tbebuildingit. Thatiswhyyouhavetofindyourownspacewithintheindustry,bothforyourproductandyourpricing.Ifyoudon't,yourprofitswillenduplikethis: Flatlined.OK,thislooksalotbetterthanthecost-basedpricing,withaprofitthroughouttheyear.Butitisalsostatic,withnochanceofaddingvaluebyraisingpriceswithoutpricingyourselfaboveyourcompetitors. Themoralofthecompetitor-basedstoryislook,butdon’ttouch.Youwanttoknowwhereyourcompetitorsarepricingtheirproductssothatyou’reinthesameballpark,buttheyshouldnotbeguidingyourdecisions.   TheBigProblemWithCompetitor-BasedPricing: Customersdon’tcareaboutyourcompetitors,theycareabouttheirvalue. Asbefore,thisismissingthepointforyourcustomers.Insteadoffocusingonwhatyoucangivethemandhowyoucanputtogethertherightfeaturesandplanforthemattherightprice,youareofferingthemsomethingthattheycouldliterallygetelsewhere. Ifapotentialcustomerisonyoursite,itisbecausetheyareinterestedinwhatyouhavetooffer.Ifit’sjustaregurgitationofwhattheyhavealreadyseenelsewhere,thentheywilljustusetheoriginalinstead.   Examplesofvalue-basedpricing We’vegonein-depthaboutwhatpricingbasedonvaluetrulymeans.Letmeshowyousomecompanieswhohavenailedavalue-basedpricingstrategy.    Drift Drift,aconversationalmarketingandsalestechnologysoftware,hasdoneakick-assjobwithvalue-basedpricing.  Firstandforemost,itspricingpageiseasytonavigate.Youselectwhetheryouarelookingforaplanbuiltforindividualmarketersorsalespeople,teams,orenterprise.So,thepricingplanisalsopre-tailoredtoyourspecificneeds.Let’ssayyou’reanindividual.Drifthasafreeoptionthat’ssaidtobeidealforsiteswhowantbasicchatcapability.Ifthat’snotenough,youcanpay$50/motoproactivelystartconversationswithprospects.Thereisarangeoftiersforteamsandforenterprise.  Withthisdiverserangeofoptions,Driftobviouslyunderstandspeoplefinddifferentvalueintheirproduct,thereforethedifferentpricing.It’snotaone-size-fits-allpricingmodel.NoteverybodyhasthesamebandwidthasalargeteamandDrift’spricingclearlyrecognizesthat.    Zenefits Zenefits,acloud-basedsoftwareformanaginghumanresourcesoffersthreebaseplansthatarefrontandcenteronitspricingpage,withgradualincreaseinpricesasmorefeaturesareadded.There’salsoaclearlayoutforalltheadd-onsZenefitsoffers.Forexample,youcanchoosetoaddpayrollmanagementtoyourplan,foraclearlystatedpriceof$6/moperemployee.Ifthesepricesdon’tsuityou,youcancontactasalesrep.  Thispricingplanisnotonlyeasytonavigate,it’ssuperpersonalized.Thebaseplansarereasonablypriced,buttherearemanyadd-ons.It’sclearthatZenefitshasdoneitscustomerresearchandvalueswhatcustomershavebeenaskingfor.    Howtocalculateandimplementvalue-basedpricing Youprobablygetthedriftbynow,butyouneedtocollectalotofdataforvalue-basedpricing.Here’sexactlywhatyouneedtodo:   Identifyandanalyzebuyerpersonas Buyerpersonasareafictionalizedrepresentationofyouridealcustomer.Yourproductwillmostlikelyfittheneedsofmanydifferenttypesofcustomers,whichmeansyoushouldcreatemultiplebuyerpersonas.Youcandefineyourbuyerpersonasbythinkingabouttheirpersonalbackground,roleinthecompany,dailychallenges,expectationsfromleadership,etc.Onceyouhavedefinedbuyerpersonas,talkaboutthemasiftheyarerealpeopleinmeetings.    Surveyandtalktoyourcustomerbase Value-basedpricingisfromqualitativeandquantitativedata.Collectcustomerdatabysurveyingcustomersonhowmuchtheywouldpayandwhichfeaturesandbenefitstheyvaluemostinyourproduct.Buyerpersonascomeintoplayherebecauseyoursurveysneedtotargetaspecificaudience.Sendingoutsurveystoarandomsampleofpeoplewon’tresultinqualitydata.Onethingtokeepinmind,sincepeoplearetakingtimeoutoftheirdaytoanswerthesurvey,keepitshortandsimple.    Analyzedatatobuildtiersandbundlepackages Onceyouhaveallthisdata,putittogooduse.Analyzethepatterns,features,benefits,andpricepointsyourdifferentbuyerpersonasvalueinyourproduct.Createtiersandpricingpackagesbasedoffofthesepatterns.   Testandreview Pricingisaprocess.Youneedtotestoutthisdataandstrategybeforeit’stotallyimplemented.Ifitdoesn’twork,thengobacktothedrawingboard.Notgettingitperfectthefirsttimeisnormal,butjustproveshowhardthisprocesscanbe.   DoesProfitWellrecommendvalue-basedpricing? We100%recommendvalue-basedpricing.LikeImentionedabove,value-basedpricinggivesanoutwardlookofyourcompany.Youputyourselfinthecustomer'sshoes,whichgivesyouauniqueperspectiveofbothyourcustomerandyourcompany.  Value-basedpricinggivescustomerstrustinyourproductandbrand.Yourpricingmatcheswhatthey’rewillingtopayforthevalueyouprovide.Youcanofferpackagesandpricepointsthatpreciselymeettheirneedsbecauseyouunderstandwhattheytrulywant.Youcanpricehigherthancompetitorsbecauseyouconductedtheresearchthatproveshowmuchcustomersaretrulywillingtopay.Youcanalsore-evaluatepricesasyouaddvaluetoyourproductandlearnmoreaboutyourcustomersandtheirevolvingneeds.  PriceIntelligentlyhelpsyoufigureitout.Wehookyouupwithapricingauditsoyoucanmapoutyourpricingstrategytobetterunderstandhowyoushoulddifferentiateandpriceyourfeaturesandplans,howtolocalizepricing,andhowtocreatepersonaandmarketmapping.   FAQsaboutvalue-basedpricing Whatisthevalue-basedpricingstrategy? Value-basedpricingisastrategythatinvolvesbasingyourpricesonhowthecustomerperceivesthevalueofyourproductorservice.Ratherthanlookingatcompetitorsorthemarketorthecostoftheproduct,yougodirectlytothesource,thecustomer,andchooseapricebasedonwhatthey’rewillingtopay.   Howisvalue-basedpricingcalculated? Tocalculatepricesusingthevalue-basedmethod,youneedtocloselyscrutinizebuyerpersonasorexistingdataonyourcustomerbase,aswellastalktocustomersabouthowmuchtheyvalueyourproduct.Youcanusethisdatatocreatedifferentpricepointsbasedondifferentpersonasandthefluctuationsinwhatthesepersonasarewillingtopay.    Whyisvalue-basedpricingimportant? Value-basedpricingisimportantbecauseitinvolveslookingoutsidetothemostimportantfactor,thecustomer,ratherthanbasingpricesonthingslikecostorcompetitors.Thisensuresyou’renotrestrictedtobasingyourpricingonexistingpricingstructuresoronachievingminimalprofitability,butinsteadonacustomer’swillingnesstopay.Italsogivesyouuniqueflexibilityinfindingandimplementingpricepointsthatsuitdifferenttypesofcustomers. ByPatrickCampbell Founder&CEOofProfitWell,thesoftwareforhelpingsubscriptioncompanieswiththeirmonetizationandretentionstrategies,aswellasprovidingfreeturnkeysubscriptionfinancialmetricsforover20,000companies.PriortoProfitWellPatrickledStrategicInitiativesforBoston-basedGemvaraandwasanEconomistatGoogleandtheUSIntelligencecommunity. PatrickCampbell Founder&CEOatProfitWell pricing Resources Share GetRecurupdates Jointhe18,000companiesfollowingthenextrelease. TearingdownSpotify'spricing Spotifydemonstratesthattheconsumermusicplayisaterribleslog,becauseyourpricingstrategyisplaguedbyheavycosts,anunreasonableconsumer,andplentyofclassicB2Cpricingbumpsalongtheway.Here'showwe'dteardowntheirsubscriptionpricingforbettergrowth. ReadMore SaasPricingModels,Strategies,andExamplesofSuccess EverySaaScompanyisdifferent,butalmosteverysingleonemakesamistakethatputsthecompanyinjeopardy.Itdoesn'tunderstanditsSaaSpricing. ReadMore CompleteGuidetoPsychologicalPricing Psychologicalpricingisacommonmarketingtacticandpricingtactic,butdoesitactuallyworkonconsumers? ReadMore TheAMEXeffectanditsimpactonpricing OnthisepisodeoftheB-side,PatrickdivesdeepintotheanalysisoftheAMEXeffect,aphenomenonofpricingwhereyourcustomerdoesn’tthinkmuchaboutthepurchase. ReadMore Subscriptionmarketinsightsyouwon'tfindanywhereelse. Subscribe AccessallthecontentRecurhastooffer,straightinyourinbox. Bysubscribing,youagreetoProfitWell'stermsofserviceandprivacypolicy.