Pricing your product in a way that aligns with its value is a crucial element of customer retention and profitability.
Customers sign up for your product because it offers value, and they will continue to use it if they believe they are paying for what they get out of it.
Usage-based pricing has become increasingly popular among SaaS (Software as a Service) companies where this approach ties monthly or annual costs to a customer’s use of the product, making it a smart way to ensure customers stick around.
In this article, I’ll explore how to define your value metric to ensure your pricing strategy is in line with the value your product provides.
What is usage-based pricing?
Usage-based pricing is a strategy that ties the cost of a product to the customer’s usage. This pricing model is becoming increasingly popular in the SaaS industry.
The more a customer uses the product, the more they pay. This pricing strategy is effective because it aligns the price of the product with its value to the customer.
The cost of the product increases as the customer’s usage increases, ensuring that they are only paying for what they need.
Why usage-based pricing is important for customer retention and profitability
Pricing is a critical factor in customer retention. If your customers feel they are not getting enough value for the price they are paying, they will not continue to use your product.
Usage-based pricing ensures that customers are paying for what they need and are getting the value they expect. As a customer’s business grows, so will their usage of the product, resulting in increased revenue over time.
The pricing strategy should always align with the product’s value to ensure that customers continue to use it and are willing to pay for it.
How to define your value metric
To define your value metric, you must look at your value proposition canvas for your ideal customer and define their Job-To-Be-Done. Break down their Job-To-Be-Done into individual parts and answer the following questions:
- Does it align with my customers’ needs?
- Is it scalable?
- Does it have appeal? In other words, does it have strong value to my ideal customers as part of my acquisition and retention efforts?
- Can value and pricing be aligned to scale sensibly in a way that the customer is happy to pay more as their usage increases?
If you can answer yes to any of the questions, your next step is to conduct a survey using Maximum Difference Scaling (MaxDiff) questions.
This survey asks customers to rate the most and least appealing parts or product features on a scale. This information will help you determine which parts of the product are most valuable to customers and should be tied to the pricing.
What is Maximum Difference Scaling (MaxDiff)?
Maximum Difference Scaling (MaxDiff) is an established market research technique used to understand customer preferences and identify the most important features of a product or service.
In MaxDiff, customers are presented with a set of items and asked to choose the most and least important ones from each set. By comparing the different sets of items and the choices made by customers, MaxDiff analysis can identify which features are most important to customers and which ones are least important.
This technique is particularly useful for understanding customer preferences when there are a large number of product or service features to consider. MaxDiff analysis can also help to identify which features are most appealing to different customer segments.
Leveraging MaxDiff can be valuable for making pricing and product decisions that align your product with your customer needs.