Value-based pricing works like this: you set a price tag on your product based on how your target market perceives its value rather than on your production costs.
The approach also heavily relies on how you’re able to market your brand and set it apart from the competition—things that have the power to shape customers’ perceptions and influence their purchase decisions.
Choosing a value-based model for your pricing may depend on whether you’re a B2B or B2C company, how big or small the perceived value of your product or service is, and how much your customers are willing to pay for what you’re offering.
As your product generates more demand, so should your pricing. But what exactly should you ensure that the price is right and customers are getting the most value from your product at the same time?
Determining Your Business’ Value Metric
While value-based pricing works great for many SaaS companies, how would you know if it would be beneficial to yours? The answer is pretty much a given—research and analysis.
In defining your business’ value metric, the following are the analyses that you have to conduct:
1. Customer Analysis. Adopt a customer-centric approach; hand out email surveys to better get a pulse from customers and even your prospects. After you have gathered answers and obtained customers’ rankings of your product features, it is time to categorize these features based on the following:
- Priority features – what your customers treat as essential parts of your product but won’t be willing to pay an additional amount for it as they consider it your product’s primary purpose.
- Unique features – what differentiates your product from your competitors; higher value and higher willingness to pay = higher price
- Niche features – specific features which potentially have value to customers that you can sell separately or as part of a premium bundle
- Non-priority features – features that customers disregard and don’t add any value to your product.
2. Market Analysis. View from a wider lens the markets you haven’t tapped into yet and develop ways to engage prospects. Necessity may be the primary driver for these prospects to interact with your brand. Introduce payment plans to identify which tier best fits their needs and budget and incorporate niche features into specific strategies to distribute value across all levels evenly.
3. Competitor Analysis. Your product can easily get lost in people’s minds, especially if many competitors sell similar products in the same space. Look at the pricing of these products and how people respond to them, whether through reviews or ratings on social media or other channels. Research also on how your competitors are marketing their products and how they boost their following across the platforms they use.
Benefits of Applying a Value-Based Model to Your Pricing
1. Reach more audiences. Once you have segmented your target market, it will be easier to set a price point for each one based on their perceived value, and in return, generate more revenue for your business. B2C companies often base their segmentation on age groups, industries their customers work in, and individual behaviors; for B2B companies, the company size of their clients is usually their primary focus.
2. Product optimization. There’s no better way to ensure compatibility between pricing and product value than to get feedback from your customers. Dive deeper into their thoughts about your product and what challenges it addresses, and build your product around this information.
3. Sustainable growth. With every segment of your target market having a corresponding price tag, you now have a clear idea of how to respond to demand, maintain revenue growth, and gain an edge over your competitors.
4. More profit, less cost. If done right, a value-based model will enable you to widen your customer base without shelling out loads of money and develop your product without falling short in quality. As mentioned above, in the customer analysis phase, non-priority features that offer no value to your product can be taken out of the formula to help reduce costs.
Pricing Strategy as a Growth Lever for Your Business
Pricing is a crucial but overlooked element in propelling a SaaS company towards growth. A value-based approach helps attain the primary goal of building meaningful relationships with customers in a highly competitive SaaS space. But it is important to note that pricing is not a one-size-fits-all thing—companies must constantly re-evaluate their pricing strategies to know what works for them and keep up with emerging trends.
Register today for the Ascent Conference 2021 to learn more about value-based pricing strategies and other sessions from the best thought leaders in SaaS.
Photo by Austin Distel via Unsplash.