Every business that sells some type of product or service has a pricing method. Pricing methods are ways of calculating the price of goods and services by taking into account all the factors that can influence pricing strategy.
There are four popular pricing methods: cost-plus pricing, competitor-based pricing, demand-based pricing and value-based pricing. Of these four options, value-based pricing is the best option, for your business.
So, let’s get into what value-based pricing is, why it’s so great, and some stellar examples of it.
What is value-based pricing?
Value-based pricing could easily be called “customer-based pricing” because that’s essentially what it is. The more formal definition describes value-based pricing as basing a product or service’s price on how much the target consumers believe it’s worth. Instead of looking inwardly at your company or laterally toward competitors, value-based pricing gives you an outward look.
Why ProfitWell loves value-based pricing
We love value-based pricing here at ProfitWell, and for three good reasons. You can price higher than your competitors because you’re basing the pricing off of what customers say they’re willing to pay. If they’re willing to pay higher than what your competitor is charging, then that means more money in your pocket.
Value-based pricing also makes improving your product a continual process. Pricing is more than just a dollar sign on your website. It includes packaging and how you offer features. Knowing what your customers value at all times will make evolving your product and features an absolute must.
Finally, since your customers are determining product value, you need to communicate with them quite a bit. This constant communication builds great company/customer rapport. You’re building trust and this trust can lead to good things down the road, like higher retention and less churn.
Who is value-based pricing for?
Value-based pricing is the best option for every company that has the time and resources to execute it properly. It’s the most representative pricing possible. For SaaS, value-based pricing is truly the only viable option. However, different forms of businesses may use other pricing methods. For example, a gas station is more likely to implement a cost-plus pricing method, which is the most basic form of pricing (selling something for more than it costs to make).
The benefits of value-based pricing
I’ve spoken very highly of value-based pricing, so I think it’s time I break down specific benefits that come with this pricing method.
Higher price point right off the bat
If you have shown there is a high willingness to pay among your customers, you can start at a higher price point. Then, as you continually add value to your product and create additional features, you can adjust prices accordingly. If you were to implement a competitor-based pricing method, you’d be duplicating what your competition is doing. What if they didn’t conduct proper research and are lowballing their pricing? If you duplicate their prices, you could be missing out on revenue. You can make the most money by going off the source of your revenue: the customer. Additionally, as your company and product offerings evolve, you should be re-evaluating your pricing strategy every six months.
Proves real willingness to pay data
Collecting willingness-to-pay data requires some serious elbow grease, but it’s worth the work. Again, willingness to pay is the maximum amount a customer is willing to pay for your product or service. It varies based on a number of factors but is one of the best ways to conceptualize overall demand at any given time. The research behind a value-based pricing strategy provides real data that forces you into a profit generating price.
Knowing what your customers are willing to pay for your product or service is essential in building an effective and competitive pricing strategy. Without it, you’re just guessing.
Helps you develop higher quality products
Taking a consumer perspective will help you discover what solutions people want to find within your products and features. Through this perspective, you’ll generate new ideas on how to continue progressing your products. Progressing your products means finding new ways to improve what’s already been built and where you can add. Offering supplementary features will boost revenue and give customers a more dynamic experience with your service.
Increased focus on customer service
The customer takes center-stage with value-based pricing. Most customer data used for value-based pricing is collected through customer surveys and interviews. This attention given to the consumer will also likely strengthen the relationships with your current customers. You’ll be more attentive to their needs and they will appreciate your diligence in helping them. This builds rapport that will increase retention and threaten churn.
The downside of value-based pricing
Like everything in life, value-based pricing isn’t flawless. I’ll go through some reasons why value-based pricing might not be the best option for you right now.
It requires ample time and resources
To adopt a value-based pricing strategy means you need to be dedicated to it. Building the basis for quantifying your buyer personas is time consuming. Figuring out customer valuations is more difficult than it sounds, which is why so many companies opt for cost-plus and competitor-based pricing. Customer research is continual. So once you adopt one pricing strategy, you use the information to build and evolve upon it, meaning the work is never truly done. This type of grit is not for everyone.
It’s not exact
Value-based pricing isn’t a hard number; it’s an approximation. It’s not 100% reliable because price sensitivity measurements and feature analysis only give you approximations of the right pricing, packaging, and positioning for your product.
Examples of value-based pricing
We’ve gone in-depth about what pricing based on value truly means. Let me show you some companies who have nailed a value-based pricing strategy.
Drift, a conversational marketing and sales technology software, has done a kick-ass job with value-based pricing.
First and foremost, its pricing page is easy to navigate. You select whether you are looking for a plan built for individuals, teams, or enterprise. So, the pricing plan is also pre-tailored to your specific needs. Let’s say you’re an individual. Drift has a free option that’s said to be ideal for sites who want basic chat capability. If that’s not enough, you can pay $50/mo to proactively start conversations with prospects. There is a range of tiers for teams and for enterprise.
With this diverse range of options, Drift obviously understands people find different value in their product, therefore the different pricing. It’s not a one-size-fits-all model. Not everybody has the same bandwidth as a large team and Drift’s pricing clearly recognizes that.
Zenefits, a cloud-based software for managing human resources offers three base plans that are front and center on its pricing page, with gradual increase in prices as more features are added. There’s also a clear layout for all the add-ons Zenefits offers. For example, you can choose to add payroll management to your plan, for a clearly stated price of $6/mo per employee. If these prices don’t suit you, you can contact a sales rep.
This pricing plan is not only easy to navigate, it’s super personalized. The base plans are reasonably priced, but there are many add-ons. It’s clear that Zenefits has done its customer research and values what customers have been asking for.
Data needed for value based pricing
You probably get the drift by now, but you need to collect a lot of data for value-based pricing. Here’s exactly what you need to do:
1. Identify and analyze buyer personas
Buyer personas are a fictionalized representation of your ideal customer. Your product will most likely fit the needs of many different types of customers, which means you should create multiple buyer personas. You can define your buyer personas by thinking about their personal background, role in the company, daily challenges, expectations from leadership, etc. Once you have defined buyer personas, talk about them as if they are real people in meetings.
2. Survey and talk to your customer base
Value-based pricing is from qualitative and quantitative data. Collect customer data by surveying customers on how much they would pay and which features and benefits they value most in your product. Buyer personas come into play here because your surveys need to target a specific audience. Sending out surveys to a random sample of people won’t result in quality data. One thing to keep in mind, since people are taking time out of their day to answer the survey, keep it short and simple.
3. Analyze data to build tiers and bundle packages
Once you have all this data, put it to good use. Analyze the patterns, features, benefits, and price points your different buyer personas value in your product. Create tiers and pricing packages based off of these patterns.
4. Test and review
Pricing is a process. You need to test out this data and strategy before it’s totally implemented. If it doesn’t work, then go back to the drawing board. Not getting it perfect the first time is normal, but just proves how hard this process can be.
Does ProfitWell recommend value-based pricing?
We 100% recommend value-based pricing. Like I mentioned above, value-based pricing gives an outward look of your company. You put yourself in the customer's shoes, which gives you a unique perspective of both your customer and your company.
Value-based pricing gives customers trust in your product and brand. Your pricing matches what they’re willing to pay for the value you provide. You can offer packages and price points that precisely meet their needs because you understand what they truly want. You can price higher than competitors because you conducted the research that proves how much customers are truly willing to pay. You can also re-evaluate prices as you add value to your product and learn more about your customers and their evolving needs.
Price Intelligently helps you figure it out. We hook you up with a pricing audit so you can map out your pricing strategy to better understand how you should differentiate and price your features and plans, how to localize pricing, and how to create persona and market mapping.