How to use value metrics in pricing your products? — (Part 2)
In SaaS pricing, you’ve got to decide not only how much to charge, but what you’re charging for. This is your value metric.
A value metric is an indication of how your customers perceive the value of your product or service. Value metrics are a group of metrics that affect the price you charge for your subscriptions or SaaS products.
Value is what buyers choose to pay (or not pay) for. Value metrics typically remain relatively stable, only changing when customers perceive the service or product’s value differently.
Thus, SaaS companies often need to bridge the gap between customers’ perceptions of value and the value the company delivers through its products or services to maintain the stability of their value metric.
A badly optimized value metric means that you aren’t capturing all the value your product represents to your users. You also limit the value of your product for users, increasing churn.
Why monitor value metrics?
The value metric is the answer to the question, “what does our ideal customer actually want in a SaaS product or service like ours?” and “how much are they able and willing to pay for that benefit(s)?”.
A customer will often buy or subscribe to your product or service based on the value it provides them. Value metrics represent what that value looks like and how much of it is sufficient to compel a customer to upgrade, renew, or sign up for free
What Are The Two Types Of Value Metrics For SaaS?
There are two types of value metrics: outcome-based and functional. Let’s review them.
- Functional value metrics affect pricing by adjusting around a function of usage. Essentially, functional value metrics charge based on how frequently a customer uses a service or product (Jobs To Be Done). Examples of frequency metrics include “per user”, “per feature”, “per event”, “per 1000 contacts”, “requests per minute”, and “per video upload”.
- Outcome-based value metrics inform how much you charge your customers based on the gains they make from your product or service. Non-functional, these focus on the goal a customer seeks to achieve (Goal to Achieve or GTBA). Revenue generated, views garnered, clicks achieved, and customers reached are all examples here. These metrics are often the key to delivering value to the customer.
How to identify your value metrics?
What are some examples of value metrics in SaaS?
Value metrics vary by use case.
Video platforms like Wistia will have value metrics such as their capacity, the number of videos customers can upload, or the ability to custom-brand content. A marketing brand like HubSpot might use revenue or verified contacts as its value metrics. Slack could use the number of messages customers can send and the number of users per channel as value metrics for its communication platform.
What is a good value metric?
An optimized value metric needs three things:
- To be easy to understand
- To align with your customer’s needs
- To grow with your customer
- To be easy to understand
- SaaS products can be complex. You could be offering seats on a CRM or help desk, analytics on financial or user data, or helping manage marketing campaigns, servers, or user authentication.
- simplicity is the key to pricing. The more time it takes to understand, the less likely it is people will sign up. Value metrics are a way to encompass simplicity in your pricing.
- This is one of the great things about SaaS. For every complex problem one company has, another expert company is offering a valuable solution. But if they can’t communicate that value and acquire customers, all that expertise is for naught.
- Your pricing page is where you guide customers through your marketing and sales funnels. If potential customers have no idea what your different plans offer, or a solid idea of what it’s going to cost them, then they’re never going to sign up for your service.
- Your value metric is the intersection between your pricing, packaging, and positioning. These “3Ps” of pricing are what make your pricing page understandable to new customers:
- Positioning: The correct value metric allows you to align your product to different segments of the market and support them as they grow.
- Packaging: A value metric acts as the main component of your different packages and as the headline that differentiates them
- Pricing: The pricing represents the ideal value of the value metric to the customer within each package.
It should be obvious within seconds to each buyer persona what your value metric is and which package fits their needs.
2. To align with your customer’s needs
- Aligning your value metric with your customer’s needs is crucial for growth. If your customers can’t get what they need from your product, they will quickly churn out. However, if they can get what they need, then they will be successful and will, instead of churning, upgrade.
- Aligning your value with your customer’s needs leads to increased LTV and the potential for reducing CAC. In turn, this leads to increased growth for both you and your customers.
- It is vital that you ask your customers what they consider the best value metric. They know what they value the most in your product and what they are willing to pay for.
- If customers see different value metrics as important, consider constructing a dual value metric to capture the highest potential value.
- In this hypothetical, let’s consider an email platform. There are a number of potential value metrics that you could consider. You could charge per email sent, or per received email, or for the number of contacts each account can keep. Or you could use per-user pricing, and charge by the number of team members who can access your account.
3. To grow with your customer
- The ultimate aim of your product is to make your customers successful. Even if you are only a small part of that success, you are making their lives easier, making them more efficient, and allowing them to grow
- A well-defined value metric provides a path to growth for both you and your customer: when they grow, you grow.
- The best thing about value metrics is that they allow you to capture more value as your customers grow. The better they do through your product, the better you do as well. 2. The only way to drill down to this ideal alignment between company and customer is through testing. Put your value metric out there and see how it performs with real customers.
- Help customers can immediately see what value they are paying for.
- Align with what your best customers do the most with your product or service.
- Provide details on what pricing plan they fit into without needing clarification from you.
- Be easy for customers to see your service or product’s impact on their revenue, such as increased savings.
- Multiple customers attribute success to this metric.
- The more your customers experience the value of your product or service, the more you can charge. This is what would fuel your growth — and the reason per-user pricing is often a hindrance to growth for many SaaS companies.