Value Pricing: When ‘Cost Plus’ is Irrelevant

Setting a price tag to an intangible tech product is a challenge for most companies. While it is easy to set price levels for manufactured goods just by calculating raw material, manufacturing, and logistic costs; it is far more complex to come up with a price in SaaS business models. One needs to think long term and be strategic when doing that.

The most common framework these days is estimating the monetary value created for the customer first, and then using this as an input to come up with a price.

Most SaaS companies utilize the 10x rule. They aim to offer an ROI of 10, by pricing their service at 1/10 of the value they create for the customer. This mindset helps their salespeople too, no decision-maker can say ‘no’ to 10x ROI!

This also explains why SaaS companies offer different price levels to different customers groups; geographically, demographically or economically. If the perceived value of a certain product is not same for different groups of customers, then they shouldn’t be getting different prices as well. Tinder, the most popular dating app, for example uses this method. Thanks to the huge amount of historical like/dislike data and other personal information such as age and gender, tinder assigns a different ‘market value’ or ‘attractiveness score’ to each user. When they want to upgrade to the premium, those with higher attractiveness will receive a cheaper price, simply because they don’t need the app as much as other people(less attractive ones) on the app need.

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