Optimising your pricing is one of the most important things that you can do to drive the growth and profitability of your business.
What is value-based pricing?
Most software companies are familiar with the concept of value-based pricing, the aim of which is to provide value to your customers, whilst also ensuring that you capture a fair share of that value for yourself. Price Intelligently defines value based pricing as:
“Basing a product or service’s price on how much the target consumers believe it is worth.”
To understand the value of your product or service to a typical B2B customer, you need to spend time understanding their business case. Typically this business case will either be based on enabling them to generate more revenue, or saving them time and money.
To understand the value of your product or service to a typical B2B customer, you need to spend time understanding their business case.
Understanding the customer’s business case will do a lot to help identify a value metric to price on. Examples of Value metrics include CRM contacts, API calls, emails sent, transactions processed and so on.
For a range of pricing strategies, Price Intelligently provides a great overview.
How not to talk about price
At some point in your sales process you’re going to need to communicate pricing to your customer. If you have a robust pricing model based on a good understanding of your customer and their business, this should be an easy conversation provided that you don’t say one of the following:
“We know you’re making X from using our product, so we’ve developed a pricing model to take Y% of that revenue”
“We know we’re saving you A, so we want you to pay us B% of that saving”
On a pure commercial level these statements make sense, but the most likely effect of explicitly stating the above is that the customer is going to feel like you’re being opportunistic and trying to gouge them on price.
How to correctly communicate pricing
Here is a much better example of how you should communicate pricing.
“Our product has a base monthly fee of $1k, which includes capacity for 5,000 transactions. Over and above that transaction limit we’ll charge you $0.18 per transaction. We have to include the additional fee because once you exceed the base transaction capacity, we need to scale up the service and our support burden also increases. This should support your business case as we know that you will [make money / save money / save time, etc].”
To enable a conversation like this you’ll need to have developed a robust pricing model which is based on an understanding of your customer and the value that they derive from your product or service.
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