Value-based pricing is my favorite approach to pricing. It’s intuitive, easy to pitch, and generally leads to the highest profit margins.
So, what is value-based pricing?
It involves charging users a percentage of what they’re spending to solve their problem without you. You do this by calculating (as exactly as possible) the cost of the problem —including things like:
- Lost revenue
- Time spent on a task
Add all these together with any context dependent costs (fees, taxes, etc.). Then determine a percent of that cost you’d like to charge—I usually recommend 10% to 50% to start with. This is the price you offer your customer, fine-tuning as you get feedback from your ICP.Example:
Allow me to share a story to help you understand the potential here.
I once worked with this startup in the UK that offered a software for biotech companies. They were charging over $100,000 for an annual license, but something didn't quite add up. These guys were helping pharmaceutical companies speed up the drug approval process, after all.
We began calculating the costs these pharma giants incurred without the startup's software. We considered everything—salaries of doctors and researchers, facility expenses, equipment costs, and more.
When we tallied it all up, we saw the bigger picture—if these companies switched to the startup's software, they could save a staggering $6 to $12 million per year. That's a lot more than what they were charging…