Pricing strategy · Pre-Sales

How do you actually* price based on customer value?

Kenneth Jones

September 7th, 2016

I've read a lot of blogs about pricing new products with no competitors on perceived client value.
(e.g. You will save $50,000 using our product. Our price is $5,000 so purchasing it should be a no-brainer)

It sounds nice, but then you have to actually apply it! I actually find it easier to create the above formulas for products that have internal uses. (e.g You were paying a bookkeeper $40,000 per year to manage your sales pipeline, but you can pay $8,000 per year for Salesforce and have your bookkeeper do something else.)

I am working on a product that will be used by consultants on client engagements. The big selling points are ease of use, time saved, less reporting errors on client updates, and better tracking of project information for future projects. 

More time = better project performance = better client reputation
More time = happier consultants = lower employee turnover
Less errors = better project performance = better client reputation
Better tracking of information = better future project performance = better client reputation

How do you squeeze quantifiable value out of such nebulous benefits?

Alexander Shartsis CEO Perfect Price

September 8th, 2016

Kenneth, Good question. There are a few ways of doing this. Here are 3 generalizable steps, and then tactics for each. Sounds like you've done 1 and are thinking about how to do 2: 1. Figure out the value you are creating 2. Figure out what your customer is willing to pay for that value. 3. Test and learn. To figure out value, there are many tactics: 1. Ask why (the 5 why's). For example, they may buy your product to save time manually entering time sheets. Which may be because someone forgot to enter his time once, and cost them $500 that week. Or it may be because they lost a $500,000 client. Very different values. Figure out why they would be buyers-and look for patterns. 2. Look at substitutes. Excel is a substitute for many things; be wary. Salesforce compared itself to $mm software companies like Siebel and eventually Oracle. People bought salesforce not to reduce their bookkeeper's work, but to be like companies that bought Siebel. Are people making that comparison with your product-or are they comparing you to Excel, which is perceived as free? 3. Do cost savings calculations. Nobody ever bought anything quickly to avoid paying a salaried employee; they buy lots of stuff to reduce their bills. For example, nobody would buy something to save a facilities manager 1 hr/wk; he does too many other things and anyway that 1hr is his job. But the same person will buy solar so you can save 1/2 your power bill. Similarly, you won't spend $1,000/mo to prevent Jim from forgetting to fill in his time sheets. But you will happily spend $1,000/mo if it would have directly prevented you from losing a big client. To determine what customers will pay, surveys are the go-to for a new product. Ask a version of following questions in a survey to target customers (which can be in live customer interviews, too). Best to ask these after framing the discussion/survey with what they're losing -- eg lost client, etc. If you ask it out of the blue, the answers will skew low. a. What price would be way too high for this service? b. What do you think is a reasonable price for this? c. What price would be too low for this, and signal poor quality? People's answers may surprise you. Once someone said $10k per month was the least they'd pay because of quality, for a service that others thought $500 was too much for. (Market segmentation is important.) if you're doing this in conversation, act surprised if the logic makes no sense. "Jimmy, you said that you lost a $500k per year client because you didn't have this software. And yet you're saying $50/mo would be a crazy high price? Help me out here... I just don't understand..." Sometimes you'll learn margins are terrible, and they simply can't afford to pay for a service. At the end of the conversation, or survey, take the order! Ask some form of "do you want to reserve a spot in the closed beta?" and if you can take a credit card deposit. Seriously. Which gets us to.... Test and Learn. With those inputs, and an understanding of your target market, you should be able to pick a starting price or two. Don't use their price!! The middle price is probably BS; the right price is likely somewhere between that and the high price. If you are going for mass adoption, consider a price on the lower end, but beware: it's always harder to raise prices. In fact for SaaS I always recommend starting HIGH. Uncomfortably high. Your support and sales costs will be much higher than you expect, especially for early customers. If you think the eventual price is $99/mo, try the first customers at $500 or $1000. It is much easier to come down, than to go up. Customers will be more engaged. Blog post here on pricing launch: In a b2b sales environment you can simply test different prices with different customers. In a b2c or self-serve saas model, you'll have to set a price and see how things go. Don't be afraid to AB test pricing, pricing pages, pricing mix, etc. if you're selling software (just charge everyone the lowest price). Eventually realize your customers will talk to each other and unless you are selling enterprise software, you'll have to zero in on a scalable pricing structure. But don't try to do that too early-learning is more valuable. Hope that helps!

Josh Kirschner Founder & CEO at Techlicious

September 8th, 2016

From the general description you provided for your product, it sounds similar to many other consulting tools already out on the market. So, your primary selling focus will likely be how your product is better than those other products and why the consultant should switch to yours. If this is your situation, than your pricing should be based on the market for similar products, rather than looking at it from a customer value perspective. Your product either needs to be cheaper than your competitors or significantly better (as confirmed by your customers) to get people to switch. If it's not significantly cheaper or better, getting consultants to adopt it will be a steep hill to climb. 

Step one should be laying out the matrix of competitors with features and pricing to determine where your pricing needs to be. Then get beta customers on board (for no/low cost, to get feedback quickly) to confirm your product really is better. If your product has a competitive value proposition, then you have a shot.

Rob G

September 8th, 2016

1. go talk to customers/prospective customers.  2) rather than focus so much on cost reduction try to come up with selling points that focus on your customers' top line, i.e. those that increase revenues, improve competitive advantage, add competitive differentiators and/or make compliance easier.  Ask any CEO, CFO and those projects/expenditures that always take top priority are those that add to the top line, then comes cost reduction, then comes 'feel good' projects.  Also on the top shelf are compliance projects - those that they must do to stay out of trouble.  cost reduction projects are not only 2nd tier, but usually a distant second behind all the other top-line projects. 

Kenneth Jones

September 8th, 2016

@Josh Kirschner

Thanks for the response! The features in the product are definitely not new, but the level of customization for the needs of this small industry makes it new. This customization makes us first to market with no real competitors. There is obviously some price guidance you can get from similar platforms, but what other pricing benchmarking strategies are there outside of competitor analysis?