Software Growth

Value-based pricing

Value-based pricing sets your price from what the product is worth to the customer, not from your costs or what competitors charge.

Value-based pricing starts with the customer's side of the ledger. You ask what the product saves or earns them, and you price at a fraction of that, instead of adding a margin to your costs or copying a rival's price page. Paddle defines it as setting the price according to how much your target customers believe the product is worth (source).

Why it suits software

Software has near-zero marginal cost, so cost-plus pricing says almost nothing about what to charge. Patrick McKenzie's argument in "You Can Probably Stand To Charge More" is that a product sold to many customers costs each of them a small fraction of what it would cost them to build it themselves, so the price should reflect that value, not your hours. He uses the analogy of a surgeon who bills for the value delivered, not the cost of the parts (source).

Paddle makes the competitor point sharply: if you copy rivals, you do not have your pricing strategy, you have theirs.

How to estimate the value you create

The percentage range is a rule of thumb, not a published benchmark. Use it to set a starting range, then test.

Example: a scheduling tool for dental practices cuts no-shows by 8 appointments a month. At $120 per appointment, that is $960 of revenue protected. Priced at 10% to 20%, the target is roughly $96 to $192 a month. Pricing it at $19 because "it's just a reminder app" leaves most of the value with the customer. This is the same move Kalzumeus describes for Appointment Reminder, which anchored its price to the cost of one missed appointment (source).

How to do it in practice

  1. Segment customers by the value they get. McKenzie's example is Bidsketch, which found agencies earning large sums with its $19 software and raised the price to $99 for that segment.
  2. Research willingness to pay. Interviews, surveys and price tests. Paddle's steps are to build personas, gather insight, build tiers, then test and refine.
  3. Package for each segment. Use tiers and a value metric that tracks the benefit.
  4. Test. Change prices for new visitors, not existing customers first.

Limits

  • Perceived value is not the same as actual value. Positioning and proof change what people believe.
  • You need a reasonable estimate of the benefit, which is hard for products without a clear dollar outcome.
  • Raising prices on existing customers needs care. Jason Cohen advises explaining the change honestly, giving notice and letting complaining customers keep their old price (see grandfathering).

For a bootstrapped founder, value-based pricing is mostly a correction for under-charging. Find your three best customers, work out what you save them, and compare it to the price on your page.

Sources

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