Most companies start with a pricing strategy that is a combination of Cost-Based Pricing and Market-Based Pricing. While that’s good in the short to medium term, it’s important to pursue Value-based pricing model and learn from your customers and what they value to evolve your pricing.
1. Cost-Based Pricing: Pricing your output based on the costs of your inputs.
Ex: I need to make 30% net margin. My all-in costs are $10/widget. I need to charge $14.29 per widget to make a 30% net margin.
2. Market-Based Pricing: Pricing your output based on your competitors’ prices.
Ex: Microsoft Word costs $5/month. Mine’s a better service - I’m going to offer it at $6/month.
3. Value-Based Pricing: Pricing your product in relation to the value it delivers to your clients.
Ex: Olympus Insurance currently runs a process that costs them $50k of Underwriter time. We’re going to step in and run that process fully for them - it will cost us $10k. Given that that would save them $40k and they have no other alternative service, we’re going to split the savings and charge them $30k.
If you’re not able to price based on value today, focus on understanding where, when and how your solution is creating value, and find out how much that value is. The sooner you can start basing your pricing on this, the better.