Originally posted on Quora.
The most important thing to understand about pricing is that it’s a balancing act.
Obviously, you need to be able to pay your bills and stay in business. Some profit would be nice too — your pricing is the key to that.
But there are less obvious aspects as well. For example, how would you feel about charging a customer $50 for your solution if you knew they wouldn’t blink about paying $10,000 for it?
It all comes down to the value you’re providing to your customers — and your pricing strategy is a matter of how you share that value between you and them.
It’s not a matter of greed either — once a customer has a certain number in their head, quoting them a number that’s too low is just as bad as if the price was too high.
To use the same example from above, a customer who expects to pay a price in the range of $10k, would not be pleasantly surprised by a low price tag — what’s more likely to happen is that they have second thoughts about the quality of the solution you’re offering them.
So, again, your pricing is a careful balancing act that needs to find a way to split the value your product delivers for your customers. Unfortunately, it isn’t always easy to find that value in an objective and quantifiable way.
That’s where value metrics come into play.
Value-based pricing is the concept of charging customers based on the value they derive from your product. The more value you derive, the higher price you pay.
Slack’s meteoric growth is a case in point on the practicality of value-based pricing
To find that, you need a metric that measures that value. Hence the concept.
Unfortunately, this is where many companies take a shortcut. Instead of figuring out what’s the true mark of someone deriving expanded value from your product, they go for an easy pricing dimension, such as “seats”.
For very few products, value comes from putting more bodies in seats. Slack is a notable exception.
To learn more about value-based pricing and how to figure out your value metric, check out:
- How To Achieve Net Negative Churn By Using Value Metrics In Your Pricing
- Mastering SaaS Pricing [A must-read book on the topic by OpenView]
- Lessons from 100+ SaaS Pricing Pages