⚖️ Trends #0051 — Value-Based Pricing
TechCrunch has released tickets to its popular Disrupt conference, which will be held virtually this year. People are taking advantage of the early bird pricing in droves. Why? Because they're framing the offer as an investment, not an expense.
Like TechCrunch, founders who pay close attention to value-based pricing can take advantage.
Markets and Ideas
Why it matters:
- Flawed pricing models misalign incentives.
- Unoptimized pricing carries huge opportunity costs.
- Pricing is one of the biggest levers you can pull in your business. With asymmetric effects on profit and valuation.
Problem: At best, flawed pricing limits your ability to reinvest in growth. At worst, it misaligns incentives, causing stakeholders to work against one another.
Value-based pricing sets prices based on a customer's perceived value. This allows you to frame offers as investments instead of expenses.
Players
Pricing Models:
- Cost-Based - Setting prices by adding a percentage to costs.
- Competition-Based - What are my competitors charging? What's the market rate?
- Value-Based - How much is this worth to a client or customer?
Value Metrics:
Services:
- Recruiters: Percentage of a candidate's salary.
- Real Estate Agents: Percentage of a sale price.
- Personal Injury Attorneys: Percentage of a settlement amount.
SaaS:
- Amazon S3: Storage used
- Mailchimp: Number of contacts
- InvoiceBerry: Number of clients
Platforms (% of sales):
Predictions
- Dynamic pricing will become common. Boardfy optimizes prices in real-time.
- Real estate agents, fund managers and financial planners will be disintermediated by software. See managed marketplaces, yield farming and robo-advisors.
- Parity pricing and currency localization will become common. The latter correlates to 30-45% higher growth rates.
Opportunities
- Build authority by writing, speaking and curating. This leads to inbound demand and pricing power. Stewart Townsend built a 7,000-person following by sharing content.
- Buy businesses with unoptimized prices, optimize and shorten your payback period. See Micro Private Equity.
- Use social proof to boost perceived value. *Don't take my word for it, listen to them. *Tools like Testimonial.to and Shoutout showcase social proof.
- Find high-leverage ways to deliver value. Sales, recruiting and (ironically) pricing are "close-to-the-money." Results are measurable and valuable.
Key lessons
- Competition is a commoditizing force. Pricing power drops as competition increases.
- Value-based pricing forces clarity. What does success look like? What does failure look like? What will we measure? Cost-based pricing skips these questions.
- Value-based pricing forces first-principles thinking. Asking "why?" leads to core buying motives.
You may be thinking: "This sounds like a lot of work."
It can be. But price optimization provides asymmetric upside. I'm speaking to a future of decentralized networks with low switching costs.
Great work!
Thanks!
Thanks @Vo_Alex!
Thanks for this insight, Dru!
My question is, will dynamic pricing apply to the content creator? Is there a platform to automatic this process?
For example, in my peak season, I have four projects to work on, and the deadline is very close. I have to charge more for clients because I have to work non-stop and sacrifice my sleeping hours. In the low season, I might only have one project to work on with a non-fixed delivery date. Why not charge less for it?
At the moment, I manually adjust the price, but it would be great to have a product to automate this process based on my availability and clients' urgency.
With the remote work trends, I have clients all around the world with a different currency. The dynamic price will also help me give clients a quote based on their local currency and benchmark.
Perhaps NFTs are an example of this. Referring to the auction process.
This seems to be based on the provider's circumstance than the buyer's circumstance. It seems closer to surge pricing.
Thanks Dru!
Thanks for the insight. I have been looking into value-based pricing and find there are certain issues with it. I believe that the key incentive for VBP is to be able to charge more for the project. However, VBP doesn't always guarantee that and is not applicable to all kinds of services. There is an interesting video on Youtube of Chris Do(Founder of one of the successful Design YouTube Channel) and Blair Enns where Blair (who wrote Winning without Pitching). In the video, few designers pitch their services to Blair as a role playing activity. During the conversations, Blair says.. it is difficult to hire designers for low-value work. Isn't that interesting? Because in VBP we assume that the value of the service is always high and hence we can charge more, but there are tonnes of low-value work as well. I am not sure how this will evolve as VBP is gaining popularity in the creative business.
Yup. Absolutes are dangerous.
Absolutes are almost always false.
Awesome great as always!
I like how you said it framing the price as an investment and not an expense.
can you share more on the "Stewart Townsend " Story?
Thanks @Yoofi_Annan. The opportunity links to his LinkedIn for reference. Check it out.
Not sure I agree with your definition of value based pricing. Your examples are consumption based rather than value based. I work with value based pricing for some of our clients and it’s based more on value provided.
The way we use it consists of a fixed base fee with bonus based on value provided. E.g we might charge the client X% more if we hit a milestone of 5% profit uplift or if user satisfaction reach a certain point. If we don’t hit those milestones we only get the base fee.
Obviously this pricing structure involves more risk
Awesome article!! I work on Parity pricing (one optimal price for each country instead of one single price). All the people have set it up claim a 30% increase in sales within weeks of setting it up. Many reasons to that:
Exportator allows you to add a Parity pricing layer to your Stripe or Paddle payment within minutes and without you changing anything to your current setup. Check it out!!
Thanks @julesmaregiano
What's the difference between Parity Bar and Exportator?
Hi Dru,
Parity bar offers 1 coupon per price range. It was a good start and it inspired me. But it lacks ambition and misses opportunities that are think could be huge. I created Exportator to take PPP to a whole new level: To make it the norm for digital goods.
How?
First, Exportator needs to create trust around the PPP topic. The #1 issue is: "So ok, with a VPN I can get a discount". To counter that, it needed to filters off IPs using proxies and VPNs: Exportator successfully detect 99.99% of these. It's not perfect, but it's good enough. The 0.01% left is super price sensitive anyways and the upside of efficient pricing largely offsets the few abuses.
Also, Exportator has to prove there is huge value in offering localized pricing: To do so, it plugs into your Stripe account (Stripe Connect official integration, also work with Paddle). This allows to create 1 unique coupon per unique visitor, and track whether it get redeemed or not. By doing so, it provides you with data you can not have any other way: Show a sceptic you sold 10x more in a country with similar access to web, similar language, etc, where you offer PPP vs one where you don't, and doubts will go away.
Finally, it removes the hardship around price A/B testing by keeping track of your offering over time, allowing you to compare effect on countries, create temporary (or permanent campaigns) in the flick of a switch, and soon I hope, give you data-backed advices on which price is optimal to YOUR product in each country in the world.
Oh, and it sets up in 2 minutes et doesn't require you to change a thing to your Stripe prices, products, billing, or anything else.
Sorry for the lenghty response, I got carried away, but I'm SUPER bullish on PPP. Because of the huge $$$ sales growth potential it has for digital tools/courses/etc makers. But also because it does it in a way that shows consideration and care to all your visitors, most of which were neglected, considered second-zone citizen up until then because of their low purchasing power. Which I think fucking sucks.
Hope this answers your question, you can hit me up on Twitter if you want to talk! @julesmaregiano
All mentioned are consumption based pricing!