Why a Value-Based Pricing Strategy Works Best for SaaS

Ready to grab a slice of the SaaS market share? To thrive in a competitive market, you need to understand value-added pricing.

But before we go over some of the most commonly asked questions about value-based pricing models and which best practices to follow, we need to stress how important it is to know your target customers profoundly before planning out your pricing. 

If you haven’t built your Ideal Customer Profile yet, do that now. With a free Breadcrumbs account, you instantly get the attributes that make up your data-driven ICP—based on your best customers (or any customer segments)—and actions that predict a higher buying intent. 

(Or any conversions, such as upsell or cross-sell). 

Once you’re clear on your ICP, read on!

What is a value-based pricing model?

A value-based pricing strategy is an approach to pricing where the price of a product or service is based on the perceived value it provides potential customers.

Patrick Campbell, a SaaS pricing expert as well as the founder and CEO of ProfitWell, says:

“Your price is an exchange rate on the value you’re providing.”

A value-based pricing structure typically follows these steps:

1. Determine your value metric. (More on this in a bit.)
2. Choose the price point.
3. Lay out your packaging.
4. Define your pricing terms (i.e., billing, discounts, and cancellations).

More FAQs about value-based pricing strategies

Here are the answers to some of the most frequently asked questions about value-based pricing.

Why does a value-based pricing strategy work best for SaaS companies?

Plain and simple, value-based pricing helps customers establish trust in your SaaS product and brand. 

Why? 

Because you’ve put in the work and research to discover what they’re willing to pay for the value you provide. The packages and price points you offer are in sync with the data you uncovered—you know what your target customers truly want and expect from you.

When should you develop a value-added pricing strategy?

Pricing expert and managing partner at Software Pricing Partners, Chris Mele, says:

“You ideally want to invest in the science behind making money after you’ve gotten into product-market fit and are probably approaching the launch of your early access program.”

Note: Mele prefers to use the term “early access program” instead of “beta testing.” 

Should you mirror competitor pricing? 

You should never copy a competitor’s pricing even if their product shares many similar features to yours. 

Mele advises:

“You need to understand what is in the evaluation set of the buyer. You don’t ever want to look and see what the competitor’s pricing is and go figure out how they’re pricing, how they’re packaging, and copy all of that because it’s not gonna work.”

Mele explains that every model carries its own risk blueprint. When you copy somebody else’s pricing structure, you’re also copying their risk blueprint, which could wreak havoc on your business. The copied pricing might not work for your product, and it might not be sellable by your sales team. 

Unfortunately, according to pricing insights pulled from 2,200 SaaS companies by OpenView, 24% of SaaS brands use competitor-based pricing, 27% make an arbitrary judgment call when choosing their pricing, and 10% use cost-plus pricing. 

When should you adjust your pricing strategy?

According to OpenView’s pricing report, nearly 4/5 SaaS brands said they change their pricing at least once a year—most of which change pricing multiple times a year. Later-stage companies tend to revisit pricing once a year on average.

Mele says:

“If you’ve reached product-market fit, you’ve got some science behind how you want to make money, and you understand that how you go about making money for your intellectual property, products, and services needs to change and iterate very quickly.

Versus if you’re high growth, maybe you iterate the model quarterly, and if you’re publicly traded, maybe yearly. It just depends on how often you’re putting out products and how often you’re creating more value.”

More on this in a bit.

Best practices when setting up a value-based pricing strategy 

Now that we’ve covered some top FAQs, here are some best practices to follow when setting up your pricing packages.

Value-based pricing strategy #1: Use a value metric 

Campbell advises that SaaS brands should always start with a value metric. For instance, what you charge per “seat,” “member,” 100 visits, data usage, or whatever metric you’re using.

According to data pulled from nearly 5,000 SaaS companies and over a million different transactions by Campbell’s team, companies utilizing a value metric are growing at nearly double the rate of those that are merely feature-differentiated. And the divide is widening. Campbell says this bakes expansion revenue into your pricing model, which also makes retention easier.

Campbell also says: “A value metric allows you to have essentially infinite price points—maximizing your revenue potential.”

Value-based pricing strategy #2: Leverage price localization for fast and easy growth

Campbell notes that a simple and quick way to see higher growth rates is to use price localization and internationalization. 

This is where you update your pricing cosmetically to use the buyer’s currency symbol—for instance, if they’re an EU user, you’d show your pricing to them in Euros—and update the relative price of the product to account for market density.

You can even use a WordPress auto translate plugin to translate your product descriptions into the buyer’s native language and further streamline the user experience.

Campbell says using this technique is an easy way to gain 25–50% higher growth rates.

Value-based pricing strategy #3: Use the isolation effect (highlight one pricing tier) and consider offering a freemium option 

Customers want to feel as little “pain” as possible when choosing a pricing tier, product, or service—and they do so by copying those who have purchased before them.

It’s why users are obsessed with combing through reviews and testimonials before choosing a restaurant or anything they want to purchase or experience. 

You can use this phenomenon to your advantage by highlighting the tier you’d like to sell most of and marking it with a badge, color, or frame so it stands out from the rest. 

For instance, take a look at Termly, a SaaS brand that offers a free privacy policy generator in its first package along with additional tiered packages:

In this example, Termly highlights its PRO+ package in a baby blue color and has a “Popular” button next to it to draw the user’s eye to this specific option. 

Secondly, the free privacy policy generator in the Freemium option serves as a way to introduce customers to Termly’s products and services. By providing value upfront with the free generator, customers can test-drive the tool before committing to a paid plan.

But there’s a caveat here. 

If you don’t have a large pool of potential customers, put the freemium model on the back burner for now. Freemium works best when you have a super large total addressable market, or TAM, and is often recommended for established players—think Slack, Dropbox, or Zoom.

Luckily, Termly serves over 800k businesses, so the Freemium model works well for its user base.

Value-based pricing strategy #4: Update your prices regularly 

To consistently see a better profit margin, incrementally raising your value-based price point is crucial. 

Campbell says:

“As your product and company improve, your price should be tracked alongside that improvement.”

In fact, Campbell says that companies that regularly update their prices at least once every six months are seeing nearly double the ARPU gain than those that update their pricing only once a year or longer.

Value-based pricing strategy #5: Talk to your customers about your pricing method 

Using customer surveys to collect customer feedback across your customer segments is pivotal to understanding your target market’s willingness to pay.

Unfortunately, only 6% of SaaS companies have performed sophisticated pricing research on buyer needs and willingness to pay. 

Not only does this have SaaS companies guessing how the market will respond to pricing changes, but they also risk outpricing or underpricing themselves out of the market. 

Value-based pricing strategy #6: Test your pricing structure before going live

De-risk your pricing by pilot pricing your packages before going live—and ideally, before you have a sizable sales team and install base. 

A/B testing may be too difficult, but when you can do is have your sales team pilot out your pricing, or you can conduct small-scale pricing experiments. 

According to Mathilde Collin, the CEO and Co-Founder of Front:

“Never experimenting with your pricing means you may never learn the value of your product and its potential for growth.” 

Collin recommends iterating on pricing frequently using small adjustments—and then monitoring how new cohorts compare to past ones with the old pricing. This method has given Front more confidence in its pricing without significant risks.

Follow those value-based pricing strategies today!

And there you have it! Today we covered why a value-based pricing strategy works best for SaaS—along with other SaaS pricing FAQs. We also went over some of the top best practices to follow when setting up your pricing packages.

Are you ready to align with your ideal customer and give them the best value possible? We hope today’s article has shed some light on what to focus on.