📂 Anchor pricing on a primary value metric

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📖 The following is an excerpt from my work-in-progress book, Founding Marketing. It's a (very) rough draft of thoughts, notes, and research... so feel free to reply with your feedback on what I should expand more on and what needs to be clarified. Enjoy!

A value metric is the way a company measures the per unit value of their product for sale (ProfitWell).

In order to choose a pricing model that packages up different features, users, and quotas, you first have to identify what your value metrics are.

Value metrics are independent of, but related to, pricing metrics.

When you align pricing with value metrics:

• Customers are more likely to choose the right plan from the get-go
• Customers naturally expand to higher plans and gladly pay more
• Churn and contraction to lower plans are minimized

Expansion revenue is powerful. Orienting pricing on a primary value metric grounds your business to grow as your customers get more value out of your product.

You’d be surprised by how many startups shoot themselves in the foot by increasing prices for factors that have absolutely nothing with getting more value out of the product.

Any time a customer is asked to be charged more for something that didn’t materially improve their experience, there’s going to be resistance. This resistance kicks off a dangerous train of thought. “Maybe there’s another tool out there that can do the same thing for less. Why did my bill go up? Maybe I can cut down on some usage. I should downgrade to another plan or ask for a discount since I don’t use all these things I’m apparently being charged for.”

“Price is what you pay, value is what you get.” — Warren Buffet

Price based on value, not based on cost or on profit margin.

This is a mistake I see a lot of companies make. They price based on what they want instead of what their customers want.

“Let your customers think they got a great deal. They’ll tell friends about you, who then become new customers. And those customers will love you, because you’ll give them good deals too.” — Ryan Kulp

Even if something is super valuable, people still need to feel like they’re getting a good deal.

And the best way I know how to describe the science behind “getting a great deal” is with what I call the value/price ratio.

So a 1:1 Value/Price Ratio means customers are getting just as much value as they’re paying for, and while this seems reasonable, that doesn’t actually help them. It gives them no reason to use you.

Whereas with a 10:1 Value/Price Ratio, customers will practically feel obligated to tell others about it and they’ll also stick around for a long time.

Sometimes, charging less is better.

Tyler Tringas of Storemapper and Earnest Capital said “By keeping prices low, you make renewing a no-brainer. You make switching ‘not worth the effort.’ You’ll lower ARPU, but you’ll get higher long-term retention.”

In fact, Aaron Chiandet of SpyFu said “We put a large dent in churn by reducing the cost of our plans. We were able to retain AND acquire more users for a net gain. LTV shrunk a tad but CAC was still well below, so it was a no brainer for us.”

—Corey

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