Why you should use value-based pricing

value based pricing model

I recently read this fantastic article on value-based pricing by Ian Blair, which provides an in-depth guide on how to set your company’s pricing strategy. Why is this so important? Value-based pricing, when done right, can significantly increase your ARPU. I highly recommend you give this article a read, but here are the key takeaways:

First off, what is value-based pricing?
In its simplest terms, value-based pricing is pricing based on how much your customers will pay for your product.

Pricing should be based on your product’s differentiating feature(s)
Many companies provide a laundry list of features that they offer, typically with a pricing sheet that offers options that are good, better and best. The vast majority of features listed are usually commodities — that is, they are features that are commonly offered by all competitors. You may consider these table-stakes, but remember that this is not what determines the value of your product offering. How your product differs, how it’s better than the competition — that is what determines the value of your product or service.

Buyer personas are key to determining value-based pricing strategy
If you’re not already talking to your customers, you need to do this as your very first step in determining your pricing strategy. Ian includes some great sample questions to ask your customers and prospective customers to inform your pricing strategy. I personally think the most important question to ask is “What is the single most valuable feature that the buyer loves?”  The answer to this will likely be your key differentiator.

Determine the maximum and minimum price customers are willing to pay
Once you’ve talked to your customers (and remember, this is something you should be continuously doing!), come up with a price range that you think customers will pay. I’ve found in-person interviews aren’t the best forum for getting customers to open up about pricing. I recommend conducting a survey that allows you to ask your customers and prospects questions such as:

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That first question should help you validate the pricing floor — or the lowest price you can reasonably charge. Anything below this and you’re leaving money on the table, making it difficult to increase rates in the future by establishing a low anchor price and/or you’re damaging your company’s brand.

The next question should be asked to validate the ceiling price or the highest price you can reasonably charge.

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I recently conducted a survey for a client designed to set the company’s new pricing strategy and found this type of questioning to be a very effective approach. The data should quickly allow you to identify the ideal pricing sweet spot.

Are you using value-based pricing? If so, I’d love to know more about what you’ve found to be effective, too.

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