A common thread connecting all great companies is the presence of a loyal customer base. Additionally, these companies also share the feats of massive profits and hyper-growth \u2013 and one of the factors for their success is value based pricing. What is Value based Pricing? Value based pricing leverages a loyal customer base and relies on their willingness to pay to make profits. It\u2019s an out-in approach to pricing, ensuring you look at your product from a customer\u2019s perspective rather than a development or a design perspective (in-out approach). By doing so, you\u2019re more focused on the \u2018value\u2019 your product is creating rather than the product itself.\u00a0 There's no doubt that value pricing works; it's a strategy that backs some of the biggest companies in the world, like Zoom, Salesforce, and more.\u00a0Let\u2019s discuss. This post will cover: Types of Pricing Strategies Is Value based Pricing Better? The Advantages of Value based Pricing The Challenges of Value based Pricing How to Implement Value based Pricing? Types of Pricing Strategies There are three major types of pricing (including value based pricing): Cost-Plus Pricing\u00a0 Cost-plus pricing or markup pricing is the simplest of all three methods. As the name suggests, the pricing considers the cost of production and adds a general markup to it. For an industry like SaaS, this method can be disadvantageous as SaaS companies offer a lot more value than their costs.\u00a0This method is also considered conventional by many as it doesn\u2019t give a complete understanding of your business\u2019 profitability since pricing is solely based on costs. Problems may arise since cost-based pricing doesn\u2019t consider customer demand and competition.\u00a0 Competitor based Pricing\u00a0 Competitive pricing is based on how\/what your competition is charging. This method is used when the product has reached stability or if it\u2019s in a highly competitive market with no real alternatives.\u00a0 An example of a company that prices competitively is Shopify. Apart from having different plans for their customers to choose from, the cost is highly competitive and is more or less the same or lower than other e-commerce platforms like BigCommerce. Shopify Pricing Page (here) BigCommerce Pricing Page (here) However, this type of pricing has the same disadvantages as cost-plus pricing in that it doesn\u2019t take into account the costs and customer demand. Moreover, constantly trailing your competition and understanding how they are setting prices can be a downside if not carried out properly, and you don\u2019t have the automation to support it.\u00a0 Is Value based Pricing better than Cost-plus Pricing and Competitive Pricing? The simple answer is yes.\u00a0 As we discussed before, value based pricing is dependent on what customers think of your product or service. It is the process of setting a product\u2019s price primarily based on its perceived value to the customer rather than its cost. \tFirstly, it is definitely more profitable. While the conventional cost-plus pricing constitutes the cost of plus markup, value based pricing adds perceived value over the markup. Since the customer experience is aligned with customer expectations, it builds loyalty and increases profits in the long run. \tAdditionally, it gives you a more wholesome picture of your company\u2019s profitability as it accounts for production cost as well as customer demand. For example, INBOUND keeps changing the price of its tickets. If the date of the event is nearing, the price of the tickets rise. It offers multiple ticket levels, so customers can choose a level they want based on how they value the event.\u00a0 INBOUND Pricing Page (here) \tMoreover, this strategy plays directly into customers\u2019 psyche since users are least bothered about production costs and overhead and competitor pricing. The only thing they care about is how much value they are receiving at a particular price point, and value based pricing aims to figure out - and take advantage of - just that.\u00a0 The Advantages of Value based Pricing Value based pricing can be highly beneficial for the right company. Overall, there are two core advantages: Profitability Needless to say, successful value based pricing means an attractive profit margin. With this strategy, you can start with higher prices rather than scaling it up slowly. As you improve your product and add more features, you can adjust your pricing as needed. Customer Centricity The customer is the focal point of your entire pricing strategy. This means a win-win pricing situation for your customer and your company. More resources can go into churning out quality products, better customer service, increased customer value, and improved customer loyalty. For these reasons, value based pricing is especially advantageous to SaaS companies.\u00a0 Apart from the fact that SaaS providers deliver greater value than the cost they spend on production, they also scale with their customers. The SaaS business model is inherently customer-centric, making it a good fit for value based pricing. For example, at Chargebee, we understand that different users find different value in our product, and hence we offer different pricing. Apart from being easy to navigate, our pricing page offers pre-tailored plans to our customer\u2019s specific needs. Let\u2019s say we have an early-stage startup approaching us, thinking of opting for a subscription billing and revenue management platform. They can opt for our launch plan - which is a freemium plan - to help them take off. Chargebee Pricing Page (here) By recognizing the varied needs of our customers, we can better match them with varied options. Many companies like Asana, Dropbox, Drift, Zenefits, and more, offer value based pricing for this reason.\u00a0 For more on SaaS Pricing Strategies, check out our Definitive Guide to SaaS Pricing. The Challenges of Value based Pricing There are two main disadvantages to value based pricing: Effort intensive and time-consuming Despite the benefits of value based pricing, it is probably the most difficult to execute, given that you have to go through a couple of steps to set the right price. Like most things rewarding, the risks of running value based pricing are high unless you have the time, resources, and the will to put in the continual effort. It isn\u2019t an exact science Value based pricing isn\u2019t an exact formula-derived number from the stats you pull off your spreadsheet but rather an approximation. Hence, you cannot be sure that your pricing is a hundred percent reliable.\u00a0 However, if you decide you can put in the time and resources needed to pull this off, the second disadvantage can be combated. The solution is to use different pricing methods in conjunction. While I seem to be advocating value based pricing (and I am!), I\u2019m not advocating that you solely place all your eggs in one basket. Let me explain. For instance, if you only depend on competitor-based pricing, you would essentially be duplicating them. And in the off chance that their pricing is off, it means your pricing is off. In that case, having another strategy like value based pricing comes in handy. Similarly, if your biggest competitor is pricing their products quite minimally (almost foolishly, to be blunt), value based pricing isn\u2019t going to help you if you want to survive. You have no choice but to take on a competitive approach to pricing. The best way to go about your pricing strategy as a whole would be to employ a conjunction of different pricing models. By doing so, you can look at pricing more comprehensively and decide what works best for you and your customers. This also aids in re-evaluating your pricing strategy since you have all the cards in front of you for your perusal. How to Implement Value based Pricing? Although the value based pricing strategy is quite popular, there isn\u2019t a tried and tested method to calculate it. However, you can take a combination of steps to do so: Customer Research Since the pricing depends almost entirely on the customer\u2019s willingness to pay, your primary source of information is your customers. Analyze your existing customers to learn about their perceived value for your product and the price point they have in mind. Buyer Personas Identifying buyer personas should be a critical part of your customer research if you\u2019re catering to different customer segments. For example, a customer who has taken a basic plan might not have a complete understanding of the features you offer in your premium or business plan, and hence he will value it less than you would. Customer Marketing Marketing efforts come in handy to educate your customers about your product, so they have all the information they need to get to a fair price point. If you\u2019re a marketer or a salesperson, remember that you will always price your product more than your customers would, since you know your product, down to the last detail, unlike your customers. Hence, continual marketing efforts to keep your customers up to date about your product are necessary.\u00a0 Market Research As much as customer data is crucial to setting prices, it may be biased if it\u2019s only based on your existing customers since they\u2019ve already proven they\u2019re willing to purchase your product. A more accurate way would be to reach a price point for acquiring new customers to better understand how people you\u2019re trying to sell to value your product and what they would be willing to shell out for it. Competitor Research A simple method of setting prices would be to scope your competition and see what they\u2019re doing, especially when your product is new to the market and you don\u2019t have the resources to conduct thorough market research. This helps you approximately gauge the target market\u2019s value for your product. Best Alternative Another means to go about value based pricing is to figure out the best alternative to your product. And the best way to do that? Ask your customers. Be it a survey or an interview, it\u2019s an amazing way to connect with your customers and get valuable information from them. Moreover, this information can also be used for product development. Differential Price Once you find out the best alternative to your product, find out the difference in features by comparing your product and giving it value. Also, review the features of your product that are better than the alternative product and estimate how much they\u2019re worth to your customers. Additionally, apart from getting information, customer surveys and interviews are also great ways to validate your pricing estimations. Based on the steps you choose to employ, you can come up with a workable formula of sorts for your value based pricing strategy. To Conclude Value based pricing has several benefits for the right company. If you\u2019re in the SaaS industry and you haven\u2019t yet considered value based pricing, it\u2019s high time you do. Not only does it improve your bottom line, but it also strengthens your brand value and enables you to build better relationships with your customers. Value pricing, when executed properly, is a true win-win situation for you and your customers.