Value based pricing
"Pricing is actually pretty simple... customers will not pay literally a penny more than the true value of the product"
With that in mind, how do you determine the real differentiating value of a B2B Saas offering and then successfully portray that to potential customers both as a sales tool but also as a deliverable?
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Suggest you narrow the question - JCPenny, SaaS, physical goods, virtual goods & services all fall within your question. And each has their own points / counterpoints that could be argued ad nauseum. – Jim Galley 11 years ago
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^ and there's an entire industry built around facilitating those arguments if you're interested in getting an MBA – Theao 11 years ago
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I have narrowed the question - I know there is an entire industry but being bootstrapped and prerevenue I dont have 10k spare to pay someone to help me out and hands on knowledge in UK is almost zero so am hoping for some insight here – Bhttoan 11 years ago
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The [priceintelligently blog](http://blog.priceintelligently.com/blog/) posts articles that may be helpful in your search. No affiliation with them. – Jim Galley 11 years ago
4 Answers
There are two steps to this equation:
- understanding what your target market wants (their problem), and
- how much they are willing to pay for such a solution
Sounds simple - like the quote in your question - but its not.
One has to factor in what the target markets rationale behind their need, what alternatives exist that meet their need, and what anchoring effects are in place (either assumed by the alternatives, or influenced by you).
Armed with this info, you then can figure out potential pricing tiers based on sub-segments (here a good article on freemium and segmentation ) so you don't simply add bells and whistles to incite conversions.
Compared to cost plus pricing, market oriented pricing, or the slew of different pricing strategies out there, value based pricing requires a lot of up front customer research to uncover the definition of "value".
Many times, its not a "pick one strategy" and apply, its a tool in the toolbox you use while building your business.
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Thanks Jim, I have read a lot of the Price Intelligently stuff as well as Lincoln Murphy, Chris Kopf, Totango and many more on the topic but am struggling to get started in an intelligent and efficient way mainly as I am so close to things that my view is tainted – Bhttoan 11 years ago
There are two things to do in this case:
1) Test, Test, Test- There is an equilibrium price, and it's most likely higher than you think it is. A/B test landing pages with different pricing structures and see which creates higher engagement/conversion.
2) See What Competitors Are Charging- If you're a startup with limited resources, it's always helpful to see what more capitalized competitors who have likely spent a lot of money and resources testing to come up with the right pricing charge.
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Thanks, competitors are making things much more "complex" - some are charging $1 per month, others are charging $15 per month with most around $3 to $5 and the really big boys keeping their pricing hidden (as expected). That said it does show us that there is a market demand at $15 as the company charging that are successful so our preference is definitely to go higher rather than lower as doing this to just make an average salary is not appealing! – Bhttoan 11 years ago
Beware economic principles: they never have and never will provide good guidance for pricing decisions. The issue is that economics is about the macro environment, so the models of what happens at micro scale may connect with, but don't need in any practical sense to portray actual reality, and therefore almost certainly won't.
However, the problem with your question isn't the confusion of economic theory and business practice, but that the phrasing of the question imports a terrible assumption that represents a disastrous, though common, work pattern.
The terrible assumption is that how to do business is this: first you make something, then you find its price.
That was the default choice of also-ran companies thirty years ago, while the leaders worked the other way round: first you find the right (highest effective) price for a customer group you know how to reach, then you make something (of which the functional / technical part is merely one of many important components).
Today you can start from any point you like - start with the price, the audience, the technology, the channel, the deal - and work from there. But if you want a robust methodology that can help you fail less, I'd go for Steve Blank's Customer Development - encapsulated in a diagram here.
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I don't disagree in any way but we got to where we are via quite a strange journey and never actually envisaged this becoming what it has and being a business so price was not considered originally only for that reason - now we are where we are it means we now have to consider it in a non ideal way but we cannot change what has gone before. Dropped you an email a few weeks ago hoping to work with you as there are very few people in UK with any sort of knowledge of this arena, if you are interested let me know – Bhttoan 11 years ago
In many B2B scenarios, there's a fairly simple way to figure out the maximum value.
What is the cost of the pain you are solving?
If that cost is 50k per month, your pricing could in theory, be anywhere from 0-50k per month. In reality, the closer you get to the pain cost, the harder it will be to do business. Of course, you must beware the paradox that pricing yourself too cheap will also hurt your chances of business, when you consider: "you get what you pay for" and "If it seems too good to be true, it probably is".
A variation on this theme would be:
What additional revenue are you delivering, beyond the cost of your product/service? Same rules apply, only in reverse.
