by Abigail Endsley
SaaS companies build products for everything, from billing clients to project management to simply storing mass amounts of data in an online warehouse. These cloud-based services are often invaluable to businesses looking to amplify their impact. And while many SaaS companies price their service by a simple cost + profit margin calculation, many are now detaching from this practice to rake in bigger profits—and increase customer satisfaction—with a value-based pricing model.
So, what is a value-based pricing model and what makes it different from the pricing strategies we see in everyday consumer goods? This article will establish the true meaning of these pricing models, their benefits, and how you can optimize them for better business outcomes.
What is a Value-Based Pricing Model?
Let’s face it, starting a SaaS company is expensive. But maintaining it at scale is more cost-effective than almost any other business out there. Value-based pricing throws operating costs out the window (for the most part) and charges customers based on three factors: the money they make, money they save, and risks they mitigate by using your SaaS product.
In short, a value-based pricing model charges the customer based on the value they receive.
Here’s what value-based pricing looks like in action:
Imagine you’re selling a simple email automation and creation tool to a team of salespeople. The platform itself isn’t flashy, and it didn’t take you long to create. However, the automation your service provides allows the businesses’ sales team to send out an additional 5,000 emails per month. This organization converts about 1% of the customers it sends an email to, with an average sale price of $100 per order.
5,000 emails x .01 conversion rate = 50 additional customers x $100 ea = $5,000 in revenue
When the smoke settles, the company receives an extra $5,000 by using your service. And while you could make profit by selling this software at $6.99, it’s ultimately better for you and your customer to charge based on the value received. Assigning a higher price, say $120, is an easy hurdle to clear for a company that gains an additional $5,000 in revenue each month.
Value-based pricing calculates how much value your customers receive from the product and prices the software competitively to reflect that value.
What to read more? Get Data-Driven Pricing Strategies
Benefits of Value-Based Pricing
The most direct benefit of value-based pricing is the ability to make more money with premium pricing. Premium pricing can also increase the perceived product value of your software, helping you acquire new (and often bigger) customers. If you’re a larger business looking for an email tool that does it all, would you even consider the $6.99/month option? Probably not, because you’d likely assume it’s not sophisticated enough to meet your needs. You may not even bother to read the feature list.
Value-based pricing also helps companies understand customers. Customer research is necessary when establishing any pricing model, and SaaS companies who dig deeply to assess the value their product provides to the customer can use this data to generate better outcomes. Quality research leads to lower development overhead, customer acquisition costs, and fierce brand loyalty.
How to Optimize a Value-Based Pricing Model
Now we know what a value-based pricing model is and how SaaS companies can benefit. How do we build and optimize this model to drive eye-popping growth and profitability?
Product Market Research
In today’s crowded marketplace, a SaaS company’s product and pricing decisions must set them apart. Potential customers will research any and every competitor before making a choice, which can be a huge advantage or disadvantage, depending on how you position your product.
Product market research determines the viability and use cases of a SaaS product and who is most likely to purchase it. It’s conducted by listing the features of a product and bucketing them based on what type of customer would appreciate them. For example, small teams and large teams have different needs. So, SaaS companies can create a solution package for small teams and a different one for enterprise customers, and each is priced differently.
Knowing your target audience is one of the fastest ways to optimize a value-based pricing model. So, once a company understands where they sit in the market, they must clearly identify their ideal customer.
Many companies approach this research process by establishing customer personas. These semi-fictional archetypes represent ideal customers’ wants, needs, and character traits. Here are the best ways to gather data for customer personas and distinguish who is ideal for your product:
- Customer Interviews
- Email Surveys
- Social Media Engagement
- Customer Reviews
- Online Research
- Focus Groups
- And Paying for Market Research Services
It’s a good idea to employ a mix of these customer research methods to make better conclusions.
It’s not uncommon to have a handful of competitors in your product’s niche. They’re deploying cash hand-over-fist, lobbying for the attention of your target audience. To stand apart, it’s essential to know your competition’s business, including its pricing structure, features, and product reviews.
Put yourself in your potential customer’s shoes and do your research, even going to far as to call your competition to ask questions about their service. This process is best undertaken Secret Shopper style, with a fictional persona leading the charge. Participate in the sales process and ask insightful questions about how their service will work for your fictional organization. Analyze their pricing to see what they believe customers are willing to pay.
This detective work is foundational information to support your own go-to-market strategy.
Test, Measure, and Iterate
Optimizing a value-based pricing model is all about data. You can’t improve what you can’t measure. SaaS companies with the right tools can explore hundreds of disparate data sets—each providing an opportunity to increase profitability.
Look to specific tiers and packages to see if pricing changes increase subscription rates. Study churn rates to discover the relationship of lower or higher priced offerings. If your SaaS company runs free trials, keep a close eye on how often those free trials convert along with different price points. And always set goals for each metric you’re measuring so you can adjust your offering and pricing to meet those goals.
Value-Based Pricing Drives Profitability
Value-based pricing is one of the most profitable ways SaaS companies can sell their product. Many customers will pay a handsome amount for software that helps them mitigate risk, save, or make money. While assigning a dollar amount to value is more art than science, most SaaS companies can find the most profitable pricing structure through market, consumer, and competitor research.
If your SaaS company is making the switch to a value-based pricing model, set yourself up for success with the best measurement and performance tools on the market. Chargify is the #1 billing partner for B2B SaaS, specializing in billing and management for complex pricing models, like value-based pricing. Get started with a 30-day guided trial of our powerful software and optimize your subscription workflow today.