I will be writing a 2-part blog that highlights why & how a product owner should embed value-based pricing strategy to target the AWS ecosystem better. This is the part 1 that explains the why.
Cost-based vs Value-based Pricing
Cost-based pricing strategy, also known as cost-plus pricing, involves setting the price of a product or service based on the cost of production plus a markup. This markup, also known as a profit margin, is typically a percentage of the cost of production. The idea behind cost-based pricing is that the price should be high enough to cover the cost of production and generate a profit, but not so high that it becomes uncompetitive.
Value-based pricing strategy, on the other hand, involves setting the price of a product or service based on the perceived value that it provides to the customer, instead of basing your pricing on the cost of production or market competition. This can take into account factors such as the unique features or benefits of the product, the target market, and the competition. The idea behind value-based pricing is that the customer is willing to pay more for a product or service that they perceive as providing more value.
Value-based pricing is complex to setup, nonetheless it brings the most successful financial outcome and is least risky in the long-term.
Therefore, as a product owner, it’s crucial to implement value-based pricing for your SaaS products, especially on channels such as AWS Marketplace. Here are three reasons why value-based pricing is essential for AWS software partners:
1. Helps you differentiate your product from competitors
In a crowded market, it can be challenging to differentiate your product from others that offer similar features and functionality. By focusing on the value that your product provides, you can create a unique selling proposition that sets you apart from the competition. Benchmarking pricing plans and marketing messages of your competitors is key here.
For example, let’s say that you offer a project management tool that integrates with AWS services. You have done analysis of your competitors’ marketing and finds that they are focusing their messaging around their product features, which is a subpar practice that you should exploit. Instead of just listing the features of your product, consequently you focus on how your product helps teams collaborate and manage their projects more efficiently i.e. focus on the business outomes the customers want. This approach can help you differentiate your product and make it more appealing to potential customers.
2. Selling perceived value attracts more customers
Customers are more likely to purchase a product that offers value for their money. By highlighting the value of your product, you can attract more customers and increase your revenue. This is made a reality by setting your price against a value metric, which is the main outcome that is measurable by the customer and affects their business outcome directly
For instance, your SaaS firm offers a security tool that helps customers protect their AWS resources. Instead of just listing the features of your product, you could focus on how your product helps customers comply with security regulations and reduce the risk of data breaches. You can create a value metric that for example is aligned with the number of API calls made or security incidents prevented. This approach can help you attract more customers who are looking for solutions to protect their AWS resources.
3. It allows you to increase your revenue
Value-based pricing helps increase your revenue by charging a fair price for your product based on its perceived value to the customer. This pricing model can also help you avoid the race to the bottom and avoid underpricing your product.
I have worked with a partner that offers a data analytics tool that helps customers visualize and analyze their AWS data. Instead of just listing the features of your product, the leaders at that firm focused on the value of emotional & functional benefits i.e. how their product helped customers make data-driven decisions and gain insights from their data. This approach helped you justify a higher price for their product and that in turn improved their revenue.