Value based pricing pros and cons9/11/2023 ![]() That is why you have to find your own space within the industry, both for your product and your pricing. You are offering more value and a better product, otherwise, you shouldn’t be building it. Your company exists to offer customers something different to what is already on the market. You don’t have your pricing strategy, you have their pricing strategy. If you’re in a competitive market, pricing for the companies involved should be close to what the market can reasonably sustain.īut the biggest downside of competitor-based pricing should be obvious. By placing yourself in the middle of the pack, you’ll be anchoring yourself for any future customers and they won’t think your product is too cheap or too expensive. By spending 30 minutes on competitors’ sites finding all their pricing information you can have a “pricing strategy.” It’s also unlikely to go wrong. Unsure of the initial value of your product, and not wanting to go too high or too low, it seems obvious that you should look at the other companies selling similar products to decide your own price point.Īgain, calculating price from competitors has two main bonuses: Then all it takes is for one of their own SaaS suppliers to raise prices and they are losing money on every sale.Ī pricing approach that utilizes competitor prices as a benchmark, rather than setting a price based on company costs or customer value.įor a SaaS company starting out in a new industry, competitor-based pricing strategy will seem the logical way to go. Then the margin is cut to 5% and then 0%, where the company is only breaking even. This works well for a few months until some unexpected costs crop up. Imagine this example: A company calculates costs, and then adds a healthy 15% margin on top. That might work a low cost product, or venues like a gas station, but it won’t work for a SaaS company. ![]() If a SaaS provider is using value-based pricing and has changed their prices, you can’t constantly change the price of your product to maintain the same margin. You can’t change your prices to account for every new hire, which means your profits will take a hit.Īlso, costs fluctuate over time. Your initial costs might include only hosting and some development, but as you grow you’ll have to factor in sales, marketing, and a number of other previously unknown costs. You won’t necessarily know all your costs, and therefore can’t know if you’re going to cover your costs. Yet, cost-plus pricing is anything but a sure win. Taking those advantages at face value, cost-plus pricing seems like a great idea and certainly a good starting point, with little overhead and definite profits. As this is cost-plus pricing, you know that you will be adding a certain margin on top of your costs as pure profit. No market research, no data analysis, no strategizing. As long as you know how much your costs are, it’s trivial to work out your price. ![]() This is to compensate for the cheaper A4 papers.Implementing cost-plus pricing has two main benefits: However, the other articles and paper formats are often much more expensive and do have a higher profit margin. To copy or print these is most of the time very cheap because people are looking for this when searching for a reasonably good-priced copyshop. Most of the time, people want to copy or print A4 papers. These shops also have a key-value item strategy. By selling other products for a higher margin, supermarkets are still able to increase their profit because people do not buy cheese only at the supermarket, but also other products. When cheese is much cheaper at one of the supermarkets, more people will come to that specific supermarket because it offers cheaper cheese than the competitors. Cheese is a very often consumed product that is expensive in comparison to other products. SupermarketsĪ typical key-value item found in supermarkets is cheese. While the profit margin on their breakfast may be nonexistent or very low, they are still able to increase their profits by selling other products that do have a much higher profit margin. By offering breakfast for such a low price, they attract people to their stores. At their stores, they sell breakfasts that are only €2,29.
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