When it comes to SaaS, value is, well, priceless. It is by far the most important aspect of pricing. But it’s a vague concept that many people struggle to understand—let alone implement in their pricing process.
Value is one of the most misused terms in marketing. Everyone has their definition, and you can never be sure which one someone is using.
But value does have meaning. Consider this article your guide to explaining what it is and why it’s so important to understand before you even think about setting SaaS prices.
This article will explore:
- Why customers care less about your latest features than you’d like
- Why value is all about customer outcomes
- The four pillars of value behind all good SaaS pricing processes
Tired of feeling in the dark about value? Read on.
Value Does Not Equal Time in Your SaaS Product
Let’s not pull any punches—value is one of the most nebulous concepts in SaaS pricing. My goal is to dispel that feeling and leave you with a clear concept of value—so you can set optimal product prices later down the line.
Let’s start with four things that value most certainly is not:
- Value is not price. The Latin word for price is pretium. It means worth, price, value, or cost. But unless your name is Cicero and you live in Ancient Rome, they are not the same thing.
- Value is not willingness to pay. But it does influence it. We’ll dive into this more later.
- Value is not your product’s features. Features enable benefits, which create value.
- Value is not how long customers spend using your product. If your customers could do the same job without even using your product—they would.
It’s important to remember why people are paying us. They’re not paying us to spend more time in Slack. They’re not paying us to send more messages in Slack. They’re not paying us to create more channels or send more reactions or upload more files.Noah Weiss, VP of Product at Slack
What Exactly Is Value, Anyway?
Value-based pricing starts with the premise that price is how buyers and sellers divide the value in a transaction. George Cressman offers a beautiful definition:
Value pricing then is a cultural orientation that focuses a seller’s business on designing and developing offerings with significant impact on the buyer’s business, then pricing to capture a portion of that impact. Specifically, value pricing can be defined as the practice of pricing to capture a portion of a seller’s economic impact on a target customer’s business.George Cressman, Handbook of Business-to-Business Marketing
In other words:
- In a market economy, trade creates economic value for both sides of the transaction. If it didn’t, the transaction wouldn’t take place. Price is merely how the buyer and seller divide the value in a transaction.
- The value that is apparent to the buyer is not always the same value evident to the seller. This difference in perspective creates problems in pricing if not well understood. You might think your CRM tool has X value, but if your customers don’t? That equals significant issues and opportunities down the line.
- Value is an abstract concept. It helps to have a more concrete set of definitions to understand what we mean when discussing “value.”
This situation brings us nicely to pricing expert Tom Nagle and his explanation of value— first outlined in his seminal book on pricing, The Strategy and Tactics of Pricing. He reminds us that before we can effectively manage price, we must understand how to manage value.
Nagle outlined several different definitions of value in his Value Cascade. It’s important to understand these before we begin to talk about SaaS pricing—think of these as the foundation upon which your pricing system must rest.
The Value Cascade has the following components:
Also referred to by economists as utility, Use Value is defined as
- The sum of all the potential benefits a client could receive from your product. Think economic benefits, emotional benefits, or social benefits.
Use Value is the primary definition we’ll explore in this article. I’ll mention the others briefly here but unpack those in a later post.
Nagle calls it Economic Value, but they’re the same. It means
- Reference value +/- differentiated value to the customer’s best alternative
Look, utility isn’t relevant to any pricing exercise you might be running. If you’re selling lemonade for $10 and your neighbor across the street is selling it for $5, then there better be some real differentiated value on offer—is your lemonade made from the finest fruits plucked from Italy’s Amalfi Coast? Or chock full of special vitamins?
The concept of a price only makes sense given alternatives. Exchange Value helps us make this distinction separate from Use Value.
Perceived Value is
- The value of your product in the customer’s mind, given the customer’s context and your ability to communicate the value of your product.
Your customers are not omniscient market participants. They might not be aware of all of your competitive alternatives. They might not know much about your differentiating benefits or may attribute high search costs to finding more information about your product or other market alternatives. Also, customers may be applying a “risk discount” to your Use or Economic Value because they are concerned that the product may not produce the promised benefits.
Remember those six-minute ab adverts you used to see on TV? The company behind that product is leaning on Perceived Value. Their ideal customers want washboard abs but probably aren’t the type to spend hours researching the latest trends in exercise, nutrition, et cetera.
Willingness To Pay
Price is what you pay. Value is what you get.Warren Buffet
It’s only after considering these three types of value that you arrive at willingness to pay (WTP). Then you can start talking about price. The common definition of WTP is
- The maximum price at which a customer will buy your product.
This definition is problematic, but I’ll leave that debate for a future post.
It’s important to understand that only Perceived Value drives customer WTP. If I’m trying to sell you a fire extinguisher, whether or not your couch is on fire will have a massive impact on Perceived Value. In other words? The context drives the need and urgency.
Most people start the conversation with WTP without thinking twice about value. It’s not until you get to WTP that you’re actually in the price world. There’s all this work before that to understand the value you create. Intelligent price management follows proper value management.
The Four Pillars of Use Value
As promised, we will dive deep into Use Value for the rest of this post. We can divide Use Value into four pillars:
- Monetary value
- Second-order effects
- Intangible benefits
- Negative value
This category represents the total economic effects of cost savings or increased income that a customer receives from purchasing and using a product or service.
Sure, your product solves an immediate problem, but downstream effects often add (or subtract) just as much value.
For example, you have two SaaS products that do precisely the same thing. That means they’re providing the same monetary value. But one product requires a full-time employee to maintain the software, while the other requires significantly less administrative overhead.
We can divide this pillar into two sub-categories: emotional or social jobs (jobs-to-be-done).
Emotional Jobs: These jobs are all creating emotional outcomes for customers. A Timex will tell you the same time as a Rolex does. But with a Rolex, you’re getting $10,000 of emotional value. They perform the same function, so the added value comes from additional emotional factors like increased status or aesthetic appeal.
Social Jobs: Humans are social creatures, so we do jobs that don’t result in direct emotional or functional benefits for ourselves. Social institutions and non-profits create value by advocating for equal rights, increased access to education, or saving the environment. Value derives from helping out other people in your tribe.
These are intangible benefits, like increased reputation, confidence, or a sense of belonging. People get tattoos because they’re trying to say, “I am not like all these squares. I’m like these other people who have tattoos.” The value is in communicating, “I’m not part of that group, but I am part of this group.” simultaneously.Dan Balcauski
Kahneman and Tversky’s Nobel prize-winning Prospect Theory has helped us recognize that humans perceive losses and gains unequally. A loss causes much more psychological pain than the equivalent gain.
When we ask customers to change their way of doing something or discard an existing product in favor of ours—switching costs—we ask customers to incur negative utility from this “loss” of what they already have.
Customers are risk-averse, especially when making big purchases that may not work out, sacrificing lost time, money, and reputational damage. Customers will pay premium prices for a product that creates real value because the fully loaded cost of a product that fails to deliver its promised value is high.
If that felt like a lot of new information to take in—don’t worry. I’ve summarized these concepts with examples in the table below.
Even if your product provides value in many of the above categories, different customers will place varying importance on each value driver. That means Use Value will vary by customer segment.
How To Determine the Value of Your SaaS Product
By now, you should have a more precise set of definitions than the generic term “value.” So the next time someone is throwing that term around imprecisely, you can direct the conversation in a more productive direction. In this section, we will get into the specifics of determining value.
An estimate of value is to pricing what an estimate of location is to navigation.Tom Nagle, The Strategy and Tactics of Pricing
Using Jobs-to-be-Done To Determine Use Value
Jobs-to-be-Done (JTBD) is all about understanding the outcomes your customers are trying to achieve. JTBD helps us focus on the outcomes customers use to measure their success and thus the value they derive.
The innovation process starts with customer insight as the primary input; however, most companies don’t have a definition of what customer insight looks like—which creates problems from the start. Suppose the main input to your innovation process is poorly defined. In that case, the chances of you getting to the end with a successful innovation are low. Innovators rarely agree on what inputs they need when they talk to customers in the first place.
Phrases like “easy to use” are benefit claims without clearly outlining the outcome customers achieve. Does it require less training time? Does the ease of use reduce risk? You need to get specific.
Example: You might have heard the story about the guy at Citibank and the $500M he accidentally wired to another bank. He was trying to make an interest payment on a loan but accidentally paid back the entire loan. The software Citibank bought wasn’t sufficiently concerned with the customer’s job: transfer money to other accounts with minimal risk of errors that can lead to considerable losses in working capital.
The critical takeaway is? Focus on the outcome your customers are trying to achieve. That’s how you determine value.
Leveraging Feature-Benefit-Value Tables
Positioning expert April Dunford, author of Obviously Awesome, has an insightful take on how to determine value. In the book, she lays out the concept of a Value Table with three components:
- Features: Something your product does or has
- Benefits: What a feature enables for customers
- Value: How a benefit maps to an outcome the customer is trying to achieve
Features are not an end in themselves. Features create customer benefits. We can translate these benefits into an outcome the customer is trying to achieve. And that outcome has value.
It’s less critical that we have precise definitions of benefit and value. Practically, we want to force people to ask, “So what?” multiple times. Why does the customer care? SaaS companies live in feature land, but customers don’t care about your features. What’s in it for them?Dan Balcauski
As technologists, we are often enamored with our product’s features. But customers don’t care about your features. Their importance is usually not apparent. That’s why it’s on us as marketers to educate them about why they should care.
Here’s an example of how to do it:
Our SaaS security product has a super scalable architecture.
That allows customers to pull in more data without the system crashing.
We can ensure that all data is appropriately ingested at scale and that the system doesn’t fail.
When customers have a security breach, they can be confident our system can find the problem. The longer a breach is open, the more data hackers can steal, which has financial and reputational implications.
That’s something that customers value.
Customers don’t care about your super scalable architecture. They do care about the magnitude and duration of their potential security breaches.
The trick is to dial in on what they care about with sufficient context—security breaches. Leads. Close rates. If your outcomes are generic, like “increase revenue” or “decrease costs,” you’ll sound like everyone else.
Learn more: A Product Positioning Exercise – April Dunford
Use the Kano Model To Differentiate Use Value Creation Opportunities Between Feature Types
Noriaki Kano published a paper in 1984 popularly known as The Kano Model. It outlines how different types of features drive willingness to pay in disproportionate ways.
Let’s take a closer look below:
|Type Of Feature||Example|
|Must-Be Features. |
These features must meet purchase consideration but don’t drive incremental customer satisfaction once the product meets the minimum requirements.
|Seatbelts in cars. |
It’s essential, legally required, and the ethical thing to do. You 100% want a car with seatbelts, but more isn’t better. Twenty-seven seatbelts in a car don’t drive incremental customer satisfaction.
|Performance Features. |
These features drive proportional incremental customer satisfaction, given improvements in the feature.
|Gas mileage. |
The better gas performance the car has, the more potential customers will value it.
|Delighter/Attractive Features. |
When they exist, these features drive outsized customer satisfaction. But if they don’t exist—customers aren’t upset because they never expected them in the first place.
|Heated seats. |
You know how great these are if you have them, especially in winter. Customers don’t expect them, but they drive outsized customer satisfaction when they exist.
There’s much more to the Kano model than we can unpack in this post. If you’re interested, check out the link below.
Learn more: The Complete Guide to the Kano Model – career.pm
Building Use Value Formulas
It’s time to apply your knowledge and start having conversations with your customers (or proofs of concept if you’re introducing a new product). These conversations are essential for understanding and quantifying your product’s value. The critical step in these customer value conversations is to drive the inquiry to dollars and cents. How will your product affect your customer’s business?
However, these insights don’t only arise from in-depth customer interviews. Any customer interaction is a golden opportunity to gain actionable data, even ones that might be seen as negative.
Case-in-point: An angry customer calls you up and says, “Do you know that every hour that manufacturing line is down costs us $5,000?” or “When your product miscategorizes orders, that costs us 10% more time in rework.” Opportunistic listening during these times of crisis can aid you significantly.
Another way you can do this is by using the following “fill-in-the-blank” statement advocated by Mark Stiving of Impact Pricing:
My customers love me because their ________ went from ________ to _______.
It’s a surprisingly tricky statement for many firms to complete. If you can fill it in yourself, that’s a good start. Even better – get your customers to tell you their answers.
These are great exercises to get to the core of what your customers value. From there, you can start constructing practical value formulas.
Here’s an example of a value formula for profit, a possible customer value metric, for a marketing automation tool:
Profit = (# of new leads per campaign) * (% improvement in campaign effectiveness) * (Lead conversion rate) * (Average profit contribution per customer)
Building these value formulas is a critical step in quantifying value. I’ll explore them in more depth in future articles.
The Most Important Aspect of SaaS Pricing Is Value
Value is one of the most important aspects of pricing—and one that too many people in SaaS don’t correctly define. And if you can’t correctly define value, you’re not ready to be talking about pricing.
I hope this post reduced the vagueness of “value” as a concept. By reading this article, you’ve already taken an essential first step towards understanding what’s important to your customers. A step that will pay off handsomely in your pricing process.