Rather than paying for tiered bundles of features, more and more SaaS customers are now paying based on what they use.
As a result, each customer’s LTV becomes more dynamic. To the extent that each individual, per-customer LTV can be predicted using machine learning at the time of acquisition, these values can be paired with value-based bidding methods in Google Ads (e.g. target ROAS).
Pairing value-based pricing with values-based bidding can help SaaS marketers lock in a more stable LTV to CAC (customer acquisition cost) ratio, scale faster, and drive up profits.
Let’s take a closer look.
What Is Value-Based Pricing?
Value-based pricing is a customer-oriented strategy that allows you to price your product based on how much your customers plan to use it and what they believe it’s worth.
There’s a shift from an older way of pricing and segmenting pricing tiers based on bundles of features towards value-based pricing. An example would be paying on a per seat basis, instead of paying for a set of particular features and then moving up to a higher tier that unlocks more features.
Because customer perceptions are a key factor when setting pricing this way, you will need a deep understanding of your market and prospective customers. This includes knowing what your target audience really wants, what they value, and what they are willing to pay.
As people are often more inclined to pay more when they have a higher perceived value, an increasing number of savvy SaaS companies are moving towards value-based pricing.
Consider this: A prospect has 5 people who are using a product and are becoming productive as a result. That number quickly grows to 10 people. What this often means is that their value has likely doubled and they are now willing to pay twice the price.
The Benefits of Value-Driven Pricing
Value-based pricing is arguably the best option for most SaaS companies. When executed properly, it can help your business:
- Get higher markups
- Focus on the customers
- Increase the perceived value
- Get a better insight into your marketplace and ideal customers
While value-based pricing has many advantages, it’s worth noting that it comes with some downsides, as well. Overall, it can be a difficult pricing strategy to adopt as it requires ample time, research, and resources.
You should also remember that – because the perceived value can change due to various economic, technological, and cultural factors – value-based pricing is not a hard number, but rather an approximation.
How Value-Based Pricing and Value-Based Bidding Work Together
With the rise of value-based marketing tactics and strategies, it’s becoming clear that value-driven pricing is the future of pricing for SaaS. This corresponds nicely with the industry’s shift towards value-based bidding on advertising platforms such as Google Ads.
In a nutshell, value-based bidding is a smart bidding strategy that lets you “productize” your conversions with different values, allowing you to bid on the perceived value of every single converting user.
So, how does that work with value-based pricing?
Here’s a quick per-seat pricing example: A prospect comes in with 20 seats and they have a predicted lifetime value (LTV) that’s based on those 20 seats.
If those seats are known, the data has to be captured. Based on that data, you can do value-based pricing. You might also be willing to bid two times higher for that prospect, as compared to someone who only comes in with 10 seats because you are matching your value-based pricing model with value-based bidding and Google Ads.
Do keep in mind, though, that while this strategy can improve performance and profits, there are certain smart bidding pitfalls to watch out for. When executing a value-based bidding campaign, focus on ensuring enough past data and carefully segmenting your audience.
The Future of Paid Acquisition for SaaS
Value-based pricing is quickly gaining momentum within the SaaS industry, and for good reason – it is customer-focused, makes improving your products an ongoing process, and, ultimately, lets you price higher.
Combining it with value-based bidding can be quite challenging to get right, but when you do, it’s an extremely effective way for driving up your profits.
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