Value-based pricing: Types, challenges, and what to consider when implementing one

A lot is happening in the world of SaaS. We’ve got the AI wave transforming how we build (and use) software, a predictably unpredictable macroeconomic climate that’s got CFOs worried, and to cap it all — declining buyer trust is leading to longer sales cycles. 

The result? SaaS companies are increasingly shifting toward a buyer-first business model that aligns their profit margins with the value that customers gain. And one way to do this is with value-based pricing models.

Here’s why this is a great option for customer-centric SaaS companies — you can monetize the value generated by your product (and AI capabilities), and your customers can pay for the value they gain from your platform. 

In this article, we’ll be unpacking everything you need to know about implementing a value-based pricing strategy — from figuring out if it is right for you and identifying your value levers to the challenges that you may face. 

 But first, your TL;DR — 

• Value-based pricing is a strategy when your pricing structure is based on a customer’s perceived value instead of your production (or operational) cost.
• SaaS businesses can use value-based pricing to balance their profit margins with the value generated for customers.
• Value-based pricing goes beyond increased profit margins — it makes you take a value-first approach to product-building as well.
• For value-based pricing to work, you need to translate the value you offer into demonstrable ROI.

What is value-based pricing?

Value-based pricing refers to a pricing strategy where businesses charge customers for a product or service based on the amount they are willing to pay. Instead of relying on competitor pricing or production costs, value-based pricing is based on the perceived value offered to customers.

But what is the value for customers? Here’s how Harvard Business School professor Felix Oberholzer-Gee defines it in his online course on business strategy —

“Value for customers is the difference between their appreciation of a product or a service and what they have to pay for it.” 

Put simply, if you’ve got a high-value product, then customers wouldn’t mind paying a higher fee for it — even if it’s ten times your production cost or double what your competitors are charging. 

There’s a reason people say “No one gets fired for buying IBM!” Companies prioritize the risk-free experience that IBM provides — even if it comes with a hefty price tag.

Types of value-based pricing (with examples)

When it comes to value-based pricing, there are two common types that you can find — 

Good value pricing 

This is value-based pricing at its most basic level — you charge a fee based on the quality of your service and how its benefits translate into value for customers. This can be tangible value (like revenue generated or time saved) or intangible value (better transparency or improved collaboration). 

Usage-based and pay-as-you-go pricing models are built on the concept of good value pricing — where customers are only charged for what they use. 

Example:

Take Twilio — using a combination of pay-as-you-go pricing and volume discounts, it ensures that customers only pay for the value they derive.

Value-added pricing

A more advanced form of value-based pricing — here, you add an extra value component to your initial offering to bump up the value quotient (and price). This is commonly seen in tiered pricing where higher levels come with added features or services (and a higher price tag).

Example:

A great example of value-added pricing is Hubspot. It provides multi-tier pricing and businesses can choose one depending on the features they require. 

Why choose value-based pricing

While buyer-first selling is a big reason for SaaS companies to pick value-based pricing, it’s not the only one. Here are some other benefits that make it a great choice for SaaS businesses. 

Increases your profit margins

With traditional pricing models, you’re either limited by your production cost or your competitor’s fees. You can't justify a higher price if you're merely trying to multiply your production cost by five or six times. And there’ll always be a competitor who’s more affordable than you. 

With value-based pricing, on the other hand, you base your prices on the value you provide customers — which can be as high as a customer is willing to pay. And convincing customers becomes a lot easier as they can clearly see the value they are receiving for the price they pay.

Differentiates you from the crowd

When you focus too much on competitors, you risk entering a race to the bottom — constantly striving to maintain an affordable price. This can also muddle your product's value proposition, making price the only differentiating factor. 

And the last thing you need to maintain good profit margins is an undifferentiated product.  

When you charge based on the value you provide, you disassociate yourself from your competitors. This also solidifies your brand’s unique selling point (USP) and creates a perception that you provide greater value. 

Let’s look at this with an example of Slack and Twist — two popular internal communication channels. While Slack has been a favorite for over a decade now, Twist has been able to carve a market of its own by focusing on asynchronous communication.

Even though it offers fewer features than Slack for the same price point ($8 per user, per month), customers are okay with it because Twist offers a different kind of value.   

Helps you build a better product

With value-based pricing, your profit margins are directly tied to the quality of your product — which means the only way to grow is by increasing the value you provide customers. 

This creates a cycle of prosperity. You build a great product, happy customers pay a premium, you invest in even better products, and customer loyalty grows — leading to long-term profitability.

Is value-based pricing right for you?

While value-based pricing is a powerful tool for SaaS companies, it's not a magic bullet. You can consider these two key questions to see if it aligns with your business model —

Can you prove value with demonstrable ROI?

The first question to ask yourself is if you can prove your value proposition to buyers which can get complicated if you can’t quantify the value. 

And while you can convince your ICP of your product’s intangible value, getting them to convince their boss (the actual decision maker), can get tricky. 

Do you have the resources to execute it properly?

At first glance, value-based pricing might seem straightforward — identify the value you deliver, set a price that reflects it, and watch the sales roll in. But as Adam Smith put it in his X thread — value is a complex subject and comes with a lot of subtext. 

Capturing this ‘subtext’ in your pricing requires a deep understanding of your target audience and intricate pricing models so your pricing resonates with a broader audience (or multiple ICPs). 

This means you need the bandwidth to research your market and set up (and maintain) complex pricing models — that will have to be updated as your product evolves. 

A 3-step guide to implementing value-based pricing

At its most basic — a value-based pricing strategy requires you to find your value axis and create a ‘sliding scale’ that moves between two price points accounting for how different customer ICPs perceive your product’s value.

Here’s a three-step framework that can help you with this —

Identify your value levers

Figure out how your product creates value for customers. You can start with these two questions, as most SaaS companies help with one value-add or the other:

• Increased revenue: Does your product directly help customers generate more sales? An example of this would be ‘wishlist apps’ that directly impact an e-commerce store’s sales.
• Reduced costs: Does your product save your customers money through increased efficiency or other means? Take accounting software or automation tools — they can reduce the time you spend on manual processes.

Talk to your customers

Now that you have a basic understanding of the value you provide, the next step is to confirm your assumptions. Speak directly with customers to understand their perception of your product's value. 

Make sure to talk to customers across ICPs and use both quantitative (surveys) and qualitative (one-on-one conversations) research methods to prevent any bias.

Quantify the value provided

The final step is to decide your ‘value metrics’ so you can put a price to the value generated. For example, if your product helps increase sales, you can look for metrics like average order value, customer lifetime value, or conversion rate improvements. 

Depending on your value metrics, you can charge a percentage of their revenue or for feature usage.

Not able to quantify the value you provide? Then the Value Stick framework can help you create more nuanced pricing models.

Here, you work with four benchmarks —

• Willingness to pay: This represents the maximum price a customer is willing to pay for your product or service. This can be the highest pricing point on your pricing scale.
• Price: This is your ideal price range — one that’s lower than the customer’s WTP so it’s attractive to them but at the same time, exceeding your production cost, so you make a profit.
• Cost: This includes all the expenses involved in creating your product and running your business. 
• Willingness to sell: This is the starting point for your price range and reflects the lowest possible price you’re willing to accept for your product after considering your cost. 

By analyzing these four points, you can strike a balance between capturing customer value and ensuring your business remains financially sound.

Challenges with value-based pricing

Now that we’ve seen how you can implement value-based pricing for your SaaS business, here are some potential roadblocks that you may encounter and how to prevent them.

Requires deep market research 

You need to understand your target market's needs, their willingness to pay for specific benefits, and how your product stacks up against competitors. Without thorough research, you might underestimate the value you provide or set a price that's misaligned with customer expectations. 

The solution — do your groundwork and talk to as many customers as possible before deciding your pricing strategy. You can even A/B different pricing models with a pilot audience — like ZocDoc — before implementing it across the board. 

Perceived value is subjective

The value your product delivers can vary for different customers. What one person finds incredibly valuable, another might see as less impactful. This subjectivity can make it difficult to identify the right value metrics and set a universally accepted price.

What you can do — Try finding different value metrics for different customer segments, so there’s something for everyone. This can help you prove your value quotient and shift the conversation from competitor pricing to your product’s benefits.

Can be difficult to scale

As your product evolves, so does its value. For one thing, different tools or features will provide varying levels of benefits, and at the same time, not all customers require the same value. 

So, how do you quantify value in a way that's acceptable to everyone?  Go for tiered pricing or multi-attribute metered pricing that allows you to take into account the preferences of a large number of customers. While the former is great for horizontal companies (like ClickUp), the latter works well for complex solutions (like Digital Ocean). 

Identify value quotients and optimize your pricing with Zenskar 

Just as market conditions and customer needs evolve, the value proposition of your product will also shift over time. This means you need a billing system that’s flexible enough to help you both understand your product’s value and monetize that value with the right pricing model.   

This is where adopting a billing system like Zenskar — which is purpose-built to handle the nuances of SaaS value-based pricing — can help. 

With Zenskar, you can: 

• Figure out your value levers and quote the right price by analyzing your customer’s usage patterns.
• Set up any type of pricing model — from traditional tiered pricing to multi-attribute metered pricing — without writing any code.
• Experiment with different pricing structures to figure out which one resonates with your ICPs.

Best of all, Zenskar automates your entire quote-to-cash process — from billing and subscription management all the way up to creating ASC 606/IFRS 15-compliant financial records. 

Plus, you get migration support, custom integrations, and an always-available customer success representative to answer any questions you may have. 

Curious to learn more? Book a demo and we’ll show you how Zenskar can help align your pricing models with product value. 

Frequently asked questions (FAQs)

1. How is value-based pricing calculated?

While there is no single way to calculate cost with value-based pricing, the value stick framework can help you visualize the balance between value and profit. It positions the price range between WTS (the minimum price you’re willing to accept for a product) and WTP (the maximum price a customer is willing to pay for it). This can help you find the right balance between your profit margins and customer value.

2. What is the difference between value-based pricing and cost-based pricing?

In value-based pricing, you set the price based on the perceived value your product delivers to customers, while cost-based pricing involves adding a markup to your production costs to determine the selling price.

While cost-based pricing is a simpler approach, it can be limiting. Value-based pricing, on the other hand, can help you charge a premium — as long as you can demonstrate the value you provide customers.

3. What are the pros and cons of value-based pricing?

Here are the possible advantages and disadvantages that SaaS companies may face with value-based pricing. 

Pros

• By focusing on the value you deliver, you can potentially command a premium price that reflects the impact on your customers.
• As customers believe they're paying a ‘fair price’ for the value received, they're more likely to be satisfied.
• Value-based pricing pushes you to define what makes your product unique and valuable — so you can differentiate your product 

Cons

• Value can be subjective and vary across different customer segments — so it can get challenging to set a price that resonates with everyone
• Value is not a constant, so you’ll have to reassess your pricing every time your product evolves.

4. Why value-based pricing?

Value-based pricing is used by businesses to ensure that customers are paying a price close to their perceived value of the product or services offered. Using the value-based pricing model ensures that prices are closely aligned with customer expectations.