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Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
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Value-Based Pricing
Value-based pricing in SaaS is a strategy that sets prices primarily according to the perceived value your software delivers to customers. This approach focuses on what your product is worth to the customer rather than what it costs you to build and maintain it.
With value-based pricing, you:
- Align pricing with customer segments and the specific value each segment derives from your solution
- Map customer needs and capabilities to determine how much value your product creates
- Conduct willingness-to-pay (WTP) research to assess customer perceptions of value
- Create pricing metrics ($/metric) that correlate with the value customers receive
- Focus on the outcomes and benefit your customers experience
Value-based pricing enables SaaS companies to capture a fair share of the value they create. For instance, our implementation of usage-based pricing for a $3.95B digital communication SaaS leader allowed them to introduce value-aligned pricing ($/voice minute and $/message) while protecting their revenue base.
Cost-Based Pricing
Cost-based pricing uses internal costs as the foundation for pricing decisions. In this model, companies calculate their costs to build, maintain, and support the software, then add a predetermined markup to ensure profitability.
With cost-based pricing, you:
- Begin with your development, operations, and support costs
- Add a markup percentage to ensure desired profit margins
- Set prices primarily based on internal metrics rather than external value
- Often struggle to fully capture the true value your solution delivers
- Risk underpricing high-value features or overpricing features with lower development costs
Key Differences
Focus: Value-based pricing focuses on customer outcomes, while cost-based pricing focuses on internal economics.
Price Ceiling: Value-based pricing typically allows for higher price points by capturing a portion of the value created for customers.
Market Alignment: Value-based pricing better aligns with how enterprise customers make purchasing decisions (ROI-based).
Complexity: Value-based pricing requires more sophisticated research methods, including customer segmentation, WTP studies, and usage analysis.
Growth Potential: Value-based pricing creates more opportunities for upselling and expansion as customer value increases.
Our pricing methodology emphasizes the importance of understanding value delivered to different customer segments and designing pricing models that align with both business goals and customer needs, enabling stronger, more sustainable growth in competitive SaaS markets.