Firms that recognize the importance of Perceived Value can price their products appropriately to maximize their full profit potential. When pricing, those who skip Perceived Value neglect vital factors in their prospect’s buying journey.
This article will explore
- Why Perceived Value is an essential component of understanding your SaaS value
- How can you boost your SaaS Perceived Value and, by extension, your price
- How to understand and proactively address prospects’ perceived risks
Let’s get started.
Perceived Value: A Valuable Missing Piece
As I’ve discussed previously, Economic Value (EV) helps you frame the value you create for customers and gives you a baseline justification for the price you set.
It indicates if your product is overpriced relative to the value you offer or steers you down other avenues, like improved value communication, if your pricing is correct.
However, Economic Value does not tell you the exact price to charge. That’s because Economic Value Estimation (EVE) calculations assume a buyer that fully recognizes the value the product offers to them. This assumption is incorrect and does not consider their perceptions of your SaaS.
Determining value does not end with Use Value or Economic Value. While these two steps are essential in defining value, they neglect specific psychological behaviors prospects exhibit. Perceived Value is the final step of the Value Cascade that helps you accurately assess WTP.
Only Perceived Value creates the willingness to pay.Hermann Simon, Confessions of the Pricing Man
Prospects are not omniscient market actors. They are not aware of every single available alternative and their relative advantages. Most of them will perform a cursory search, ask friends and colleagues, and read a few reviews before deciding which product to purchase.
While EVEs are helpful tools, prospects are not robotic maximizers motivated only by the absolute optimal value in the market, regardless of the effort required to find it. Unlike you, an expert in your product and market, your prospect is only aware of a subset of all possible information, which will shape their perception of the value of your product.
Also, prospects are not solely rational economic actors (i.e., homo economicus). Multiple psychological factors are involved in purchasing decisions, which you haven’t captured in your EVE model. Therefore, you must consider this other value aspect before proceeding to price.
The price a customer is willing to pay reflects the customer’s Perceived Value of your product. And achieving the maximum SaaS Perceived Value involves more than communicating the features and benefits of your product.
A Value Cascade Recap
This article is the third installment in my series focused on value and the Value Cascade. I’ll quickly recap Use Value and Economic Value if you’re just joining us now.
Use Value is the sum of all the potential benefits a client could receive from your product. It includes social, economic/functional, and emotional benefits (i.e., Value Drivers).
Economic Value (EV) is an objective approach to estimating the market value of a product by considering your SaaS value in relationship to competitors. It takes your product and compares how positively or negatively differentiated it is from your Next Best Competitive Alternative (NBCA). In a market economy, the market sets the price for non-differentiated value. Your pricing power resides in the domain of your differentiated value.
What Is Perceived Value?
The objective value of your product only matters to the degree that your customer thinks it matters.
Customers are not spreadsheets. They don’t simply view your product’s value through the analytical lens of an EVE calculation. Yes, an EVE helps set an objective measure of the product value. However, a customer may not be considering the same reference alternatives, value metrics, or points of differentiation as you did when you built your models.
A buyer’s context and constraints influence their choices. Remember my beer pricing example from this article on customer segmentation. A fair price for a beer at the grocery store may be $1. Contrast that with a beer at a music festival, which may cost $10. The justifiable price in a grocery store is not the same as at a major league sporting event or concert.
Finally, customers use a mix of psychological assessments/biases, rational analyses, and relative comparisons. Buyers use mental shortcuts when making decisions. Using these mental shortcuts, buyers arrive at their valuation of your product.
What Hinders Maximum Perceived Value?
Human beings do not have an internal value meter that tells us what things are worth. We need context and references to define the value of each product we evaluate. Prospects need references to compare the relative advantages and value of alternatives.
Your prospects’ perception of value changes as they become more educated about a market. As prospects proceed along their buying journey, they learn more about what is essential in your product category.
Lack of education about the market or time and energy to research all possible alternatives can hinder maximum Perceived Value. Economists generally refer to the investment of time, effort, and energy to become educated about a purchase as search costs. The cost-knowledge trade-off leads prospects to use available, although incomplete, information versus spending more time and energy researching alternatives.
As we say in Product Management, “This is not a bug; it’s a feature” of the process! If you understand this journey, accept this as excellent news. It can help you frame your product in the best possible light and provide prospects with the correct information at the right time.
What Influences SaaS Perceived Value?
Each prospect calculates the value of your product based on their perceptions and knowledge.
Fortunately, you can influence your SaaS Perceived Value. But like any good chef’s knife, this can cut both ways. Poor value communication can negatively impact your prospect’s WTP. Effective value communication can improve the possibility of a sale at higher prices.
You can affect Perceived Value by the degree to which customers are accurately informed about
- Your offering (i.e., What you sell)
- Available competitive alternatives (i.e., Who sells something to get the same job done, or what are indirect options to getting the job done)
- Your competitors’ offerings (i.e., What are the products, features, and packages available)
- Your differentiation from your competitors’ offerings (i.e., Why what you sell is better/worse than alternatives)
Influencing Perceived Value requires careful attention to your value communication. But first, you must understand what dimensions affect prospects’ evaluations for innovative SaaS solutions.
What Dimensions Affect Prospects’ Evaluations of Innovative Products?
There are a variety of dimensions that influence a customer’s perception of value when evaluating an innovative product.
- Knowledge about the benefits and drawbacks of alternatives. Because of high search costs, customers need help understanding what makes your product better or worse than other options. It’s incumbent on you to help them understand the relevant differences, given your understanding of their needs.
- The complexity of new solutions or compatibility with current processes or technology. The time, energy, and resources involved in deploying a new solution and training those using it will affect a prospect’s Perceived Value. Even if your product is the best thing since sliced bread, changing existing processes may require much more time and expense than the product’s price.
- Knowledge of available competitive alternatives. Remember, Perceived Value (PV) involves comparing competitive options. Value is relative, and a prospect’s awareness of your NBCA can influence their PV. SaaS companies must be aware of their competition and the alternative solutions offered to prospects.
- Ability to measure and observe the impact of differentiators. Prospects may discount or disregard value claims they cannot easily measure or compare with the status quo or your competition. For example, if one of your value propositions is that you help increase organizational alignment, that may be great, but there’s no standard way to measure organizational alignment. In that case, it’s more likely that prospects will disregard (at worst) or discount (at least) this value proposition.
- Ability to try out a product before purchase. This last one is particularly relevant, as software is an experience good, meaning the prospect’s perception of value changes as they use the product. This concept underlies the use of Free Trials or Freemium models in the software world. Customers can evaluate value beforehand using whitepapers, testimonials, and demos. However, the customer’s personal experience after using the product is compelling. This experience allows the customer to confirm your product’s practical value relative to their specific needs and environment.
How to Influence SaaS Perceived Value
Value communication is a tool GTM teams use to boost prospects’ Perceived Value and WTP. Effective value communication will achieve the following goals:
- Help customers fully understand the benefits of your product. Since consumers are not experts on every possible option, the seller must communicate the product’s value.
- Improve customer WTP through effective value communication.
- Increase customers’ likelihood to buy (LTB).
- Inform customers and frame the context in which customers view a price through marketing and communication.
So, how can you influence Perceived Value? Let’s dive into it.
Feature vs. Benefit vs. Value Communication
Some companies focus on communicating their product’s incredible features or benefits, while others concentrate on value communication. Your team must understand how value differs from features and benefits to communicate value.
Let’s see how these three focuses differ.
Features are the functional components of your product. These features could include role-based access control, integrations, reports, or dashboards.
Unfortunately, my experience has demonstrated that most B2B SaaS teams rely on feature communication instead of value communication.
When using feature communication, you discuss your SaaS features with potential customers. This behavior forces the prospect to translate extensive product feature lists into how the product improves their life and how they will practically apply a given feature.
If you’re not in control of this translation, the prospect will likely a) not make a connection to value or b) make it in a way that maps to the preconceived notions of their environment and your product. In other words, not in a way that serves your interests or the prospects’ evaluation priorities.
Product benefits include all positive advantages your product provides a customer. Your product’s benefits could include that it’s easier to use, has faster execution, or has higher performance.
Benefit communication is better than feature communication. Benefit communication goes a bit further than feature communication by describing the distinct advantages of a product. However, both fail to identify the value customers get from the product.
It is vital to listen to your customers and know what benefits they desire. However, while it is essential to listen to customers, Product Managers need to complete their due diligence. Vague comments on the benefits of a product do not translate to clear value statements.
OK, the product is “faster,” but how? If the product was faster, what would that mean to your business? What is the process this product is involved in end-to-end? What is the lack of speed costing you? How much more revenue could you gain if it was faster?
In case you think I’m exaggerating, Tony Ulwick has a fantastic example in his book What Customers Want from a JTBD study he performed on cell phone users. His study found 21 ways customers defined their desired outcomes from a benefit statement as simple as easy to use.
Using a vague statement like easy to use places an immense burden on your prospects to understand the actual value of your product. Again, they may fail to make the connection and therefore be less likely to purchase.
Effective Value Communication
Your job, as the seller, is to communicate and provide assurances of your product’s value. If not through features or benefits, then how can you do this? Answer: Communicate value.
If you’ve done your homework, you understand your customers’ operations nearly as well as they do. And you know how they think and talk about improvements to those operations (i.e., their outcomes) that are relevant to your product. These are the inputs to your EVE.
This homework sets the foundation for your quantified value statements. When communicating quantified value claims, credibility is essential.
When dealing with quantified value equations and outcomes, it’s better to be roughly right than precisely wrong. As you built your EVE, you created value equations that define your customers’ value metrics. You must be confident you have the variables in your value equations correct. However, it’s unlikely that the values of those variables will be 100% accurate for all customers.
Identify and share a credible range based on past customer success outcomes. And don’t be afraid to share your equations with your prospects. Make it a two-sided conversation and invite them to share the variables’ values for their organization.
Don’t promise outcomes that your product cannot deliver or that stretch beyond the credible proof you can provide, lest your prospects lose trust. We don’t want to create an adverse reaction.
Quantified value realization from past customers goes a long way to shoring up your credibility with prospects. Prospects are naturally skeptical of vendor claims but are more likely to accept them if you support them with customer statements they can verify.
Increase Perceptions of Your Product’s Performance Benefits
You can use various tools and techniques to increase your prospect’s perception of your product’s performance value. I’ve provided some of these tools and techniques in this section.
Create a marketecture. A marketecture is a business jargon term combining marketing and architecture. This artifact helps your GTM team break down your monolithic product into customer-relevant components. This tool allows the GTM teams to communicate the product’s overarching capabilities in a way the customer can easily comprehend. Label these modules with customer-friendly terms and outline why a part is essential, how it works, and associated customer value (i.e., success stories).
Balance between highlighting your unique differences vs. assuring value realization. I’ve talked a lot about understanding and communicating your differentiated value. However, as products increase in complexity, prospects can begin to feel overwhelmed with information. As this happens, you can help prospects with their decision by switching the focus to assurances of value realization. You will sway your prospect more by reassuring them that “everything will be OK” than by detailing your solution’s differentiated details.
Speak your prospect’s language. Use words that resonate with your buyers. Frame cost savings or revenue gains in the language your customers use to describe their operations. Know what value drivers your prospect cares about and speak to those. Being too generic can be detrimental here. For example, saving costs or increasing revenue are value statements that one can generically apply to any product or company. How do you save them costs? What part of their process do you make more efficient, performant, and less error-prone? Help prospects envision how your product will directly benefit their lives.
Control the Reference Value
A prospect considers price and value within a contextual frame. Embrace this opportunity to reframe the context of a prospect’s comparison.
For example, I’ve been attending CrossFit classes for many years. CrossFit gym memberships are expensive—$200 to $400 a month. Compared to Planet Fitness or Gold’s Gym, this is 2 to 10 times more expensive. An intelligent marketing manager could also frame CrossFit as “group personal training.” Personal Training can be $50 to $100 per session. Through this lens, the value is more apparent, and the price is more reasonable.
Your value differentiation claims depend on your firm’s grasp of your NBCA and other competitive alternatives. Your marketing and sales teams need to understand the options prospects are comparing your product to. This knowledge will allow them to ensure the prospect is comparing apples to apples.
As in the gym membership example, a product’s value becomes apparent when you put it in the proper context.
Train and Support the Sales Team
Your GTM teams must support your value claims to use value-based pricing. Value-based pricing cannot be an internal exercise with the pricing and executive teams running research and building spreadsheets. Marketing, Sales, and Customer Success must support your SaaS value.
Sales reps can be as difficult to persuade as customers. They are the ones that have to stand in front of the customer with complete confidence and bear the questions that will inevitably arise.
Conflict can result if your sales team cannot handle prospects’ barrage of skepticism. None of your sales reps want to be on the phone dealing with a skeptical prospect because they cannot support the lofty claims marketing has made. The better prepared they feel to handle the onslaught of customer inquiries, the more likely they will be to help your value communication strategy.
It’s up to Marketing to support and convince salespeople of the differentiated value your product provides. Train your sales reps on how to communicate value.
Understand the Buying Center
Each stakeholder in the buying center – buyer, gatekeeper, initiator, influencers, users, and deciders – has different criteria for evaluating your product’s suitability.
Also, different customer segments will place different importance on value drivers. Think: Who am I talking to, and what do they care about? Proper communication tailored to individuals buying criteria will improve Perceived Value.
Listening is the number one skill any sales rep should have. Your sales reps must be great listeners to know how and when to adjust your communication. Customers are all different, and they have different constraints and contexts that define the value drivers they care about.
Clear communication tailored to the specific individual you pitch to is essential throughout the buying center. If neglected, a deal could easily be killed by one person, even if you’ve convinced the other stakeholders.
Understand and Proactively Address Prospects Perceived Risks
A purchase process is a risk minimization process. Whether consciously or subconsciously, a prospect weighs multiple risk factors across the options they are evaluating.
For example, a prospect thinks, “What if I go to bat for this solution and it doesn’t meet our needs? My reputation could be on the line.” Or, “What if the product doesn’t work as well as the vendor promised because of the peculiarities of my environment? A longer-than-expected implementation? Or my company’s adoption of the new system.” So a prospect will discount your product’s value by the amount of their perceived risk.
There are several perceived risks your GTM team should be aware of
- Performance risk – The risk of the product not performing as expected.
- Financial risk – The risk of monetary loss if the product fails.
- Time risk – The customer’s risk of losing time due to product failure or underperformance.
- Social risk – The risk of the product’s failure will impact the social capital of the purchaser. (e.g., “No one ever got fired for buying IBM”).
These perceived risks can cause a prospect to discount the amount or credibility of your value claims. This discounting process applied to your value claims is called a risk discount. If a prospect does not believe your product can deliver, how likely will they purchase it? If addressed, these risk discounts can prevent a prospect from lowering their Perceived Value of your SaaS.
Your sales team needs to be aware of a prospect’s perceived risks and proactively address them.
SaaS Value Communication Shortcuts
Most buyers don’t seek the absolute best product in the market. Instead, they trade between searching for a good enough product and their time, effort, and energy. The more you instill confidence, the easier you’ll make their decision. I’ve outlined some proven shortcuts you can implement to build credibility in a prospect’s mind.
Customer testimonials and logo gardens. Prospects need to be confident your product provides their desired outcome. Testimonials from existing customers or displaying well-known brands who trust your product are proven reliable shortcuts to improve your credibility.
Create and focus on “assurances of value,” especially for complex products. Prospects need reassurance that your product can provide the outcomes they seek.
Change value focus at different points in the purchase journey. Understand the entire buying center so you can effectively adjust the Perceived Value for each buying center. Have different pitches for each buying center stakeholder, focusing on the value drivers that matter to that specific audience.
Mitigate or aggravate switching costs. If you are the disruptor trying to land a prospect, you want to mitigate switching costs (e.g., training, implementation). And vice versa, if you are trying to retain a customer, you want to aggravate switching costs.
Identify and focus messaging on the value metrics customers may have yet to consider. After a brief market review, prospects may only consider a limited number of value drivers. You can assist the prospect by identifying value drivers they weren’t aware were important.
For example, some customers may overly focus on the purchase price when the Total Cost of Ownership (TCO) is more relevant. Or some may be focused on finding a minimal point product that solves the pain today, not realizing that if their company continues to grow, they will be back in the market in a year – having to rip and replace an entire solution that couldn’t grow with them.
Reading a product review, a white paper, or your marketing website differs significantly from the customer directly using the product. Allow easy ways for prospects to experience your product’s value.
With SaaS products, free trials can allow a prospect to experience the value of your product thoroughly. Nothing convinces a prospect of your product’s worth more than them experiencing it firsthand.
Continue to iterate and refine, analyze, and improve the evaluation experience. How customers experience your product during an evaluation or free trial significantly changes their Perceived Value. This factor makes management’s attention to the evaluation process critical for supporting your pricing strategy.
One massive learning from my time in Product Management is “Onboarding is never done.” You need to refine and iterate this crucial part of your product continuously.
Managing Your SaaS Perceived Value
By now, you should understand the importance of PV and the danger of neglecting this step of the Value Cascade.
You can influence Perceived Value through these practical value communication tools:
- Focus on value communication over feature/benefit communication
- Increase perceptions of the performance of your product
- Control the reference value
- Understand the buying center
- Understand and proactively address prospects’ perceived risks
- Use value communication shortcuts
- Demonstrate value
Perceived Value rounds out our understanding of Value in the Value Cascade. You must manage this last element of value before considering pricing.
When you understand PV, you gain the opportunity to maximize it. And when prospects clearly understand your product’s value, their WTP and LTB will increase.
Want more B2B SaaS pricing and packaging insights? Follow Dan on LinkedIn and Twitter.