Cost plus and competitor based pricing models are useful, but they are of no reprieve in the age of global SaaS business. You and your startup have access to more data than ever before. You need to take advantage of the digital sales channels and analytics to develop tangible insights about your customers, competitors and markets.
Value based pricing entails determining the price of a product based on what the customer is truly willing to pay.
Value based pricing, in its most simple form, needs to understand why the customers use your product. You have to understand that it’s not your product, but the context, that generates value. The value isn’t contained in the object themselves, but in the meaning that the object represents to the owner.
Tell a Better Story
New York Times Magazine columnist Rob Walker, in 2006, did an experiment to evaluate whether it is the object or the context that provides value. He bought random, low value objects ranging from $1 to $4, at thrift shops. He weaved short stories around the objects that created context and gave them new meaning. When he put the objects with the accompanying stories on sale, the value rose 2700%.
When your product has an inspiring narrative, something that connects with the customer, it becomes valuable and the customer is willing to pay for it. For e.g. A businessman may like your laptop because it is light and easy to carry while travelling, a student may like the same because it is economical, a gamer may like the extra RAM and graphics card, a designer may like the HD display and vivid colors. These unique attributes of your customer segment will help you set prices for the product bundles that resonates with them and their willingness to pay.
You need to have a breakdown of how the customers value the different features of your offerings. You’ll also need to know about your alternate competing products. You can no longer classify your customers as small, medium and large (personal, startups and enterprise?). Only those who truly understand their customer personas and what they value, can benefit from this method.
Let’s look at some of the benefits of this model:
1. Helps your sales team
Understanding what the customers value, can be a real eye opener for the sales team who often think of tablestakes as premium offering. [Table stakes refers to the minimum requirements of a business. If you don’t deliver them, the customer often takes their business to someone else]
This shift in discussion from price to value can forever change the tone of buyer-seller relationship.
2. Phenomenal customer service
You’d be identifying what the customers are truly looking for in your product. This attention to customer’s opinion and requirements will help you serve them better. This will increase satisfaction, loyalty and retention- the key drivers of long term value.
3. High quality products
Product features and improvements will be driven by customer demand.
While researching your competition, you’ll identify what the customers value most in their products which will help you improve your own offerings, thereby increasing your value.
Companies moving from Cost plus method to Value based pricing model can gain 1% to 3% of incremental margin.
As the needs change, the value that the customer places on your product will also change. Keep an eye on what the market is saying about your products. Keep A/B testing. Your ability to read customers will help you see future trends coming, and proactively adjust the pricing on the fly.