Why Value-Based Pricing is the Best Pricing Strategy: Do you know what’s great about SaaS businesses? The margins. Once you build the software and you deploy it into the cloud, the net additional cost of bringing on more customers from hundreds of thousands of millions is not a lot more, at least not like any other industry. Think about a restaurant think about a factory or think about car service.
Any one of those things tobring on 10x more customers, you’re gonna have to do waymore capital investments. Whereas with software, youjust turn on more servers, and it scales.
That’s the amazing partof SaaS Businesses. That’s why I love them. But at the same time,there’s a cost to this. The cost is becauseit’s negligibly so cheap to add on more customers,we as SaaS founders, we tend to undervalue ourproducts and the software. And we tend to underpricewhat we should be charging. We tend to leave a lotof money on the table and what happens is yourbusiness gets stuck.
So, if you’re feeling like, hey, everything should be great, and we should be growing a lot faster, but you’re not quite getting there. You can’t quite cover your CAC to LTV, and it’s just not quite working, your win rates are not quite there, chances are your pricing model, your pricing strategy may be screwed up. It may be that you’re thinking about your pricing strategy on a cost-plus basis, instead of a value-based pricing model.
In this episode, I’m gonna walk you throughthe three principles you absolutely need to know so you can adopt avalue-based pricing strategy. But there’s some common pitfallsto this that I fell into, so we’re gonna dig into those as well. Intro! (upbeat music) (loud cracking)What’s up, everybody? Welcome to Unstoppable. I’m TK, and on this channel,I help SaaS founders like you grow your SaaS businesses faster.
If you are new to the channel, I drop an episode like this three times a week.(air whooshing) So, be sure to hit the Subscribe button (bell dinging)and that Bell icon that way you’ll getnotified every single time I drop an episode(fingers snapping) with the TK energy.
Now, if you’re alreadypart of our community, if you’re part of my SaaSGo-to-Market Coaching Program, welcome back! Super awesome to have you here. Now, back at ToutApp, thatwas my last SaaS business, pricing was something that amazed me. When we first started out, it was just me. I was a solo founder. It was a self-service business. And I was literally tryingto figure out pricing.
Maybe you are because you’re in the early stages. And I thought, okay, let’s just do, it’s an email product. You can’t even bold an email. It’s a simple text editor. We were in the super early days of sales engagement. Let’s just do $9 a month.
And one of my friends, Lauren Gagnon, I went to college with her. We were talking about it. She was like, “This isfor salespeople, right?” I’m like, “I think that’sgonna be the primary use case.” She’s like, “Well, if asalesperson gets one more deal, that’s like worth thousandsof dollars to him, and you get him more deals, right? So you should charge it way higher.”
And I’m like, “What? Really? I’m like, “Yeah.” But I’m like, “It’s a simple email tool. It’s nine bucks a month.” She’s like, “You should go higher.” So we started at $30 a month. Now at that time, $30 a month for a prosumer product, salespeople swiping their credit card, was unheard of. It was blasphemous. It was crazy.
We weren’t even CRM. We were just an email tool, but I put it at $30 and people started paying. And on top of that, we said it was $30 a month. And really it’s about a dollar a day, and it gets you more deals. And people start paying even more. And through the course of ToutApp, we took that price from $30 a month to 49 79 to $125 per month per seat. And the market kept buying and kept buying more, which was incredible.
Now that aha moment that I had through the course of that journey was the fact that people pay for the result, not so much for what it costs you. It didn’t cost me that much to run a little web tool in those early days with the text editor and a template editor and just sending to track their email. I could have charged five bucks a month, and it would have still been profitable.
Because I charged at $30and communicated the value, everything changed. And this is where value-based pricing comes in. And then when you shift your pricing models and think in terms of value-based pricing, then everything changes for you. And you can actually accelerate the growth of your SaaS business with the customers you’re already acquiring.
So I wanna dig into exactly how to implement this because there are some common pitfalls. So I’m gonna dig into the three principles that you absolutely need to know. So if you’re excited to dig in, go ahead and smash that Like button if you haven’t already, and let’s go-to principle number one.
So principle number one is toembrace value-based pricing and really have that mental shift in your mind about whyvalue-based pricing is important. Let me explain. So essentially when itcomes to your customers, they basically in their heads,say I use this software, this is your software righthere, to accomplish a result in the business so thatwe can, in the business, either make more money,save money, or reduce risk. That’s it. This is super important. You can rewind this if youwant to look at this again, but I’ll repeat it.
I use the software to accomplisha certain business result. So that we can either make more money, save money, or reduce risk. If you can’t slot in your software into this simple sentence structure, then there’s something wrong.
Then you don’t quite know what your value prop is. You definitely don’t know what your strategic narrative is, and pricing is the least of your worries. But what’s important to do is really understand that people don’t buy software for the sake of buying software. They’re looking to achieve a certain business result.
And that business resultis usually tied to either making more money, savingmoney, or reducing risks. Those are the main reasonspeople buy B2B SaaS software.
So what you need to do with that first principle is make that mental shift, it’s not about what your software costs you. It’s not about how cheap you can make it. They’re looking at the price. They’re looking at the time they have to spend to use that software. And they’re comparing it to that business result. And therein lies the difference.
If you’re doing cost-based pricing, you’re essentially looking at your software, and you’re saying, okay, cool for this piece of software and the servers that I need run, what do I need to do? What are my costs? What are my service costing me or my engineers costing me, and lets us price it according to how many customers are we gonna get?
Whereas when you’re thinking about your pricing strategy, you should actually look at the business result and think about what kind of value they’re getting. How much are they willing to pay? And once they pay that and they achieve this result, the thing pays for itself. So it becomes an investment. This is a mind shift that we all have to make especially as early-stage founders. It’s not about what it’s costing us to run the software. It’s more about the value they’re getting and what the price is.
So they start to think aboutit more as an investment. Now, sure, I could haveput ToutApp at $5 a month. I could have given it for free,but because I said, “Look, it’s $30 a month dollar, $1 aday, and you get more deals,” they start thinking whenI communicated that price, “Oh cool, if I pay $30 a month, my commission on one extra deal is this. Then I can make that moneyback. This is nothing.”
On top of that, the $30 communicated that this is a valuableproduct worth their time.
Not some 1.99 little appthat they’re never gonna use. That’s probably not constructed well. So you can start to seehow value-based pricing not only just helps the consumerconceptualize what value they’re gonna get out of your software and why it’s importantand the weight of it, but it also helps youreally convince the consumer why they should buy your product. Then you’re already catching on.
That’s the first mental shift that you have to make, value-based pricing versus cost-plus. It’s not about the software and the cost around it. It’s a business result and the value they get out of that. So that’s principle number one. Let’s move on to principle number two. This is another mindset shift I have to make to actually adopt value-based pricing and think about the pricing strategy in the right way so I could grow my business.
One of the toughest thingsto do as founders, as CEOs, especially as your companystarts growing really fast as you start to do more deals is you have a mental barrier around money. I’m not turning thisinto a self-help thing. You just literally have a mentalbarrier around your money. Let’s just say, pick anamount, pick any amount. Pick a big amount in your mind. And let’s just say in your mind you chose $50,000 or $100,000. Now I don’t know what yourfinancial situation is, but it almost doesn’t matter.
I want you to imagine yourself when you were graduating college, and let’s just assume for a second you didn’t have a trust fund. If someone were to wiretransfer in $50,000 into your bank account, what would you do? How would you feel? You would feel like, “Oh myGod, that is a lot of money! Let’s go party,” or let’s go invest it,” depending on where your values are. $50,000 is a lot of money when it comes to yourpersonal bank account. If it just shows up, you’relike, “This is awesome!” What are all the things I can do with it? However, for a business,$50,000 is nothing. Especially for large businesses, $50,000 is a rounding error.
There are some businesses that spend more than $50,000 on spoons. This is a difference that you have to adopt when you’re thinking about your pricing strategy when you’re thinking about actually charging people, and when you’re thinking about actually asking for money on deals. Businesses think about money way differently than normal people do, and rightfully so.
And so you have tounderstand the difference between my money, which isyou, and the business’s money. So my money, the way it works generally, and again, I don’t want to turn this into a personal financething, but generally speaking, you’re thinking aboutearning money, saving money, paying for things that youwant, paying for stuff, and then hopefully youstart investing that money.
But that’s the order thatmost people operate in. Now, businesses, they only have one model, at least the great big ones, or the mid-sized onesor the successful ones.
You wanna invest a dollar and get $2 back. And the more money theyhave, they’re like, “How do I invest thisdollar and get $2 back? And if there’s ways I can invest a dollar and could get $2 back,I’ll do it all day long because that’s my purpose as a business.” That’s it. That’s what businesses are for. Now, we, in our own lives, choose to use our money differently. Maybe we give to a great cause. Maybe we save the money forour kids’ college educations. Maybe we take thatvacation, get some R-and-R.
Maybe we spend it on education. And we essentially earnthe money, save the money, and then we pay for stuff. But the scale at which we operate versus a business is wildly different. And the model that we operatein is wildly different. This is something thatyou have to internalize because of two reasons. Number one is thatbusinesses are essentially looking at your software tool and saying, “If I pay you a dollar,will I get $2 back?” Which goes back to this first principle when they’re looking at it,they’re really looking at, what’s the result I’m gonna get, and am I gonna get $2 backout of this based on the cost?
That’s how they’re thinking about it. The second thing is theamount, $50,000, $100,000. What you’re comfortable with will have to be challenged and changed, and the easiest way todo that is recognize your money is differentthan a business’s money. Businesses operate at different scales.
$50,000 is probably a rounding error. And yes, a dollar is a dollar, but a dollar is not a dollar when it comes to between your bank accountand a business’s bank account. And this is somethingyou’re gonna actually hit a head bound on. When we were raising prices on the sales side of the business, when we were moving from$49 a seat to $79 a seat to $125 a seat to a minimumplatform fee of 20K, our actual sales reps hada mental barrier on it. It’s like, “Oh my God,that’s a lot of money.
How can I possibly ask?” I’m like, “Listen, you haveto start thinking about it in terms of the moneyand the bank account.” I know that if I were to wire transfer $50,000 from the bank,from the business bank into your personal account,you’d be very happy.
But that’s not how businesses think. And there was a mental barrier of them thinking about what is a big deal, what is an appropriate price to ask, but it’s really easy to break through if you start to think aboutthe result you’re delivering and the difference between howbusinesses think about money and how normal people think about money.
You guys starting to get this? Now, before I go to principle number three to break through some of these barriers and actuallyadopt value-based pricing, here’s the thing aboutvalue-based pricing. The concept is easy, but the mind blocks and the mental shifts you have to make as a founder is actually harder.
This is not a difficult concept but shifting is actually hard, which is why I’m givingyou these three principles.
Now, if you’re getting value from this if you’re starting toget some shifts already, if you’re starting to seehow value-based pricing is important, but there’ssome traps in there and you’re starting tosee how to overcome it, can I just get a yes in the comments below (air whooshing)so that I can hear from you? I’d love to hear it from you.
My team loves it when weget comments from you. Also smash that Like buttonfor the YouTube algorithm. It means the world to us. If you are buildingout the growth strategy of your SaaS business, ifyou’re trying to figure out all the levers to turn, including pricing, I also have a five-pointSaaS growth strategy guide. It’s completely free. It includes a lot of resources on how to create a growth strategy.
I’ll link to it below. You don’t have to go right now. Let’s go into principle number three. Principle number three is asyou start to think through, what is the value ofdelivering, the business impact, and how do we price based on that? I recognize that there’s a difference between my money and the business’s money. You’re gonna have to codify all of this into a cohesive pricing strategy.
Now, the easiest thing to do is just say, “We’re gonna charge X,” right? But a proper pricing strategy actually looks at specific things. So when you build your pricing strategy, you wanna think about packaging. What are the tiers that you have, and how do you structure those tiers? You’ll also want to think about price. Now, is it doing $29 a month,$30 a month, $32 a month? It varies. Maybe it’s a minimum platform fee. There are some questions there.
Also, you want to think about optimizing for certain metrics. You wanna optimize it fornet revenue retention. You wanna make sure your CAC to LTV ratio is right, and you really want to make sure you’re charging as much as possible because the more you charge, the better quality customers you’re gonna get, the more money you’re gonna make, the more you can invest in growth, the more capital you’re gonna be able to raise, the more success you’re gonna have.
It all feeds together the higher you charge, believe it or not. So all of this needs to come together into your pricing strategy. Now you might be wondering, how do I figure all this out? I’m committed to value-based pricing.
I did an entire video on how to build (bubble popping)a pricing strategy for your SaaS business. I kind of give you the overview and the core components(bubble popping) so you can dig into it a lot more. (upbeat music)So can check out that video. You don’t have to go yet.I’ll link to it below. So to recap, value-basedpricing is where it’s at.
Understand why value-basedpricing is important, what the business resultyou’re delivering is, and what the valueassociated with that was and priced accordingly. Number two, make thatshift, know the difference between your own moneyand the business’s money, how businesses think about money and how you think about money. And there’s probably moreto be covered on that.
I don’t wanna turn this intoa personal finance channel. Yes, I know you shouldinvest your own money. You should think aboutyourself as a business, but that’s neither here nor there. But just know the difference on how businesses think about money. And number three, buildout your pricing strategy.
I’ll link to that video below. If you got value from this video, be sure to smash that Like button. (light squeaking)If you have a team member, (button clicking)a fellow co-founder, if you’re a part of a groupof other SaaS founders, please share this video. It’ll just mean the world to us. We put a lot of effort into these videos. We put a lot of love into these videos, and we wanna spread it as far and wide to as many SaaS founders as possible and impact their lives.
Also, if you’re building out the growth strategy for your SaaS business, and you want a process to follow, go ahead and download my five-point SaaS growth strategy guide. Inside of it, I give you the key pillars that build the growth strategy for a SaaS business, additional resources, and a one-page template on how to build out a growth strategy. It’s all included in there. It’s completely free. Just go to getunstoppable.com/strategy, or just follow the link below. And lastly, I drop a video like this three times a week.
So if you’re not subscribed already, be sure to hit the Subscribe button and that Bell icon. You will get notified every single time I drop an episode like this. And mention in the comments below if there are specific questions you have around value-based pricing strategies.
I respond to every single comment. I’d love to hear comments from you guys. So that would be awesome as well. And lastly, remember, lastly, lastly, lastly remember, everyone needs a