Value-based pricing is a pricing strategy that sets prices according to the estimated value of how a product might be perceived by a customer.
It does not take into account the cost of developing the product and its past prices. In this way, the company earns a neat profit without increasing the volume of its product.
Let's take a look at how the right pricing strategy can help bring in new customers and retain the old ones.
Value-Based Pricing vs. Cost-Based Pricing
Value-based pricing determines a price based on the customer's perceived value of the product. Often times, in value-based pricing strategies, the price of the product is equal to or higher than cost-based pricing.
Cost based pricing rather is a strategy that determines a product price by adding the cost of producing the product, manufacturing and its distribution. The company then adds a premium to it and comes up with a sale price.
Example of Cost-Based Pricing
- Cost of materials: $50
- Cost of labor: $50
- Miscellaneous: $30
- Total cost: $130
- Desired profit: $30
- Sale price: $160
How well do you know your business?
Get deep insights into MRR, churn, LTV and more to grow your business
Choosing the Right Pricing Strategy
Choosing the right pricing strategy is important in sustaining your business. When you start a new business, it is important to get your pricing right.
Finding the proper structure for pricing isn't always easy. When looking at a pricing strategy, marketers need to consider a number of different factors before they settle upon the right price.
- Research your product well and stake out the competition - Find out who your competitors are and at what price they are selling.
- Analyze your target market and find out how much are they willing to spend on your product or a similar product.
- Calculate the value of the product together with the cost of production.
Pro-tip: Pricing strategies change over time, don't always stick with one.
A free 14-day trial from Baremetrics can help you determine the right way to price products based on what your customers are looking for, your company's metrics and how profitable your business can become!
Calculate Customer's Life Time Value (LTV)
Calculating your customer's LTV value will help you price your products accurately.
For example in a SaaS company,
If the customer pays a subscription of $30, spends $5 for miscellaneous support, and the company is able to retain the customer for 20 months.
Customer's LTV = 30 - (5 x 20) = $500
This way, companies are able to glean how much a customer is willing to pay for a product.
Read more: Calculate Customer Lifetime Value
Choose a pricing plan that will benefit both you and your customer. Ensure that the customer is able to pay the required plans without having to think too hard on whether your product is worth the price or not.
Recommended reading: What is SaaS Pricing Template
How Baremetrics Can Help!
Baremetrics is dedicated to providing your company with metrics in real-time. Our tools can help you plan and predict the future in every way with its brilliant forecasting tool.
If you're ready to consider value-based pricing and take your company to the next level, you're not alone.