Value-Based Pricing 101
Exploring how you can unlock value-based pricing for your company
Peter Reinhardt, the founder of Segment (sold for $3.2B to Twilio), recently mentioned in an interview with Logan Bartlett that the biggest mistake they made in the beginning was not doing value based pricing earlier.
They had applied a cost+ pricing methodology which is where you take the cost of producing the product and apply a margin on top. This limits the potential upside and completely ignores the value you are creating as well as not addressing the willingness to pay.
When they changed to value-based pricing they increased their ARR by 150x just by making a simple change in how and what they charge. Admittedly this was from a very low base but I do think that most B2B SaaS companies will benefit from this pricing strategy.
Value-based pricing is where the price is determined by the perceived value from the customer instead of basing it on production costs.
Lets explore what it takes to effectively use value-based pricing and how you can implement this in your own startup.
Mastering Value-based pricing is all about the things “beneath the tip of the iceberg” really well
1. Foundation: A Repeatable Sales Framework
A strong and repeatable sales process is the foundation for doing value based pricing. You must have a structured sales process in order to consistently be able to apply value based pricing at your company. Without a strong framework in place you will be relying on individuals ability to sell value.
Command of the Message
At Templafy we used Force Management and their Command of the Message framework. Command of the Message focuses on creating a consistent buyer message. It provides a structure that enables salespeople to clearly articulate your value and differentiation, align that value with your customer’s problem, and then deliver on the promise.
The focus is on using a repeatable framework that enables you to guide the conversation – discovering the needs of your prospects and linking those needs to solutions you can offer. At its core it focuses on creating a large delta between where the potential customer is today (the issues) and where it will be with your solution (positive business outcomes). The larger the delta the bigger the value and the higher the price you can charge.
2. From feature selling to value based selling
Many B2B SaaS companies are focused on selling features not value. Most often they have developed features and products inside-out not taking into account the user and their issues.
As part of shifting towards value based pricing the company needs to start focusing on the buyer, their problems and how your solution solves that. This happens by understanding the customers issue and needs as well as through in-depth segmentation.
No customer speak “features”
I have yet to meet a customer that speak features. No buyer wants to buy 13 technical product features - they want to buy a solution that will solve the issues they have.
Often the company have all of the right ingredients to solve the customer issues they just need to bundle them together based on use-cases and focus on the overall value of the solution not what individual feature can do.
Example of a company with over 90 individual features
3. The holy trinity of value based pricing
Once the foundation is in place you need to be able to quantify the value. There are 3 core areas to get right in order to maximize the value and hence the price.
Deep Discovery
ROI
Business Case
3a. Deep Discovery - the 5 whys
At the root of successful value based pricing are strong discovery questions. This is the most important step to get right. Without deep discovery to uncover the customers issues and the consequences of those issues you will not be able to tie your solution to a high value problem.
Some salespeople have a tendency to rush the discovery process, anxiously trying to get the order. Any first call should always be about the customer and their issue. At this point the sales rep should purely ask questions about the issue the customer is facing and not give in to the temptation to start talking, or even worse, showing the product.
You need to dig, dig and keep digging until you find an issue that is worth solving. And once you find the issue you need to keep digging. Remember, the bigger the delta the bigger the deal.
Questions such as the below are in general great discovery questions:
What's working well?
What does good look like?
What’s the biggest frustration in XYZ situation?
How does XYZ impact your ability to achieve critical outcomes?
What’s holding you back from solving XYZ challenge?
Following a strong discovery call you need to get buy-in from the customer around the issues and that those are worth solving. Re-iterating the situation today and the negative consequences arising from those is a crucial step in the sales process.
3b. Business Case
While deep discovery is what sets you up for success you also need to be able to quantify the value your solution will provide in a tangible way. This is where the business case comes in.
Normally the creation of the business case starts following the discovery call (1st call) and then is a continuous iteration throughout the next 3-4 calls.
Based on your conversations with the customer you will have received core information around:
Positive Business Outcomes: What are the outcomes that the customer can expect with your solution. An example of this could be: Increased productivity and reduced costs due to faster turnaround time
Required capabilities: What is required for the customer to solve the issue they have. This is where you ensure you position yourself favorable against competitors by highlighting capabilities that they don’t have. An example of this could be: Leverage existing data and content as part of the workflow creation process
Metrics: What are the metrics to measure success upon. An example of this could be: Decreased time to complete workflows (hours saved per week)
Business cases are important to quantify the value and be able to point to something that translates the solution into cost savings, revenue increase or risk reduction. Often the decisions makers have not been part of all the calls and therefore need a summary of the solution and the positive impact it will have on the business.
Social proof
To support your ROI model and Business Case you should ensure to include social proof through case studies. Highlighting other similar customer that had a similar problem and a similar solution is a very strong way to convince a buyer that this will also work for them.
3c. Return On Investment (ROI)
The days when you could just show the product in a demo and expect the customer to sign an agreement are over. Most enterprise customers are cutting cost and the number of SaaS solutions have increased. Economic buyers have to decide which solutions are absolutely vital for the company and which ones are more of a nice to have.
Example of a ROI slide
CFOs are the de facto decisionmakers
Due to the increased scrutiny over budgets - most large purchase decisions are now being done by the CFO. This is particularly the case for enterprise deals above $100K.
In order to position yourself at the top of that list you need to ensure that you have trustworthy and quantifiable ROI. CFOs are data-driven and want to ensure that they are getting the most bang for their buck. In addition they are very savvy when it comes to reviewing ROI models and the quality therefore matters a lot…
No one believes ROI models you have created (or commissioned Forrester to do)
A lot of companies get ROI wrong. The only way to create an ROI model that works is to do it together with the customer. You need to ensure they have bought into your methodology, your assumptions and the expected results. The more you can co-create, or ideally have the customer do it, the more trustworthy it will appear.
Showing an ROI of 1243% from a Forrester reports is not sufficient anymore and no one believes them. I doubt Forrester will create “bad” ROI reports for customers who are paying to have them done.
To summarize below are the 5 steps needed to implement a value based pricing strategy:
Foundation: Building a repeatable sales framework
From feature selling to value based selling
Deep Discovery - why, why, why
Quantifying value through a Business Case
Building a trustworthy ROI model
If you are looking to implement value based pricing or need input on your existing strategy feel free to reach out on pallebroe@gmail.com.
Loved it! I often observe startups struggling to nail down 'value-based pricing' without first considering whether they have a repeatable and scalable sales process. They often try to jump directly to the pricing model without validating the sales process.