Value-based pricing is a pricing strategy that involves determining a product or service's price by the perceived value it offers to customers rather than the cost of production or competitor pricing.
The value-based pricing strategy focuses on the benefits and value that customers receive from the product or service. It considers factors such as customer needs, preferences, and willingness to pay.
Here’s a value-based pricing example.
Suppose a SaaS brand ABS has priced its product subscription at $150. Then, a brand XYZ launches a similar product that should be priced around $150. Using value-based pricing, XYZ launches its product at $160 based on the value added to the new product.
To set value-based pricing, there’s no standard formula. You must research a few aspects before setting your final selling price.
Customers - Find out how much your customers are willing to pay. Conduct surveys or contact customers individually to analyze how much they would be ailing to pay and the value they associate with your offerings.
Market - Evaluate the market to determine what potential customers are willing to pay for your product offering. Conduct thorough market research to find how much target customers are willing to spend for a product similar to yours.
Competitor analysis - If your product is new, consider competitor analysis. Look at the main competitors and determine the price their customers will spend on the product. Setting similar prices will help you gauge how much your customers value your product.
Here are a few benefits of value-based pricing.
Higher profit margins- By focusing on the value provided to customers and their willingness to pay, value-based pricing can result in higher profit margins than cost-based or competitive pricing strategies.
Customer-centric approach - Value-based pricing encourages businesses to understand their customers' needs and preferences. Thus, it leads to better product development, improved customer satisfaction, and better customer relationships.
Differentiation from competitors - By focusing on the unique value and benefits of products or services, you can differentiate your SaaS product from competitors and potentially command premium pricing.