⚖️ Trends #0051 — Value-Based Pricing

TechCrunch has released tickets to its popular Disrupt conference, which will be held virtually this year. People are taking advantage of the early bird pricing in droves. Why? Because they're framing the offer as an investment, not an expense.

Like TechCrunch, founders who pay close attention to value-based pricing can take advantage.

Markets and Ideas

Why it matters:

• Flawed pricing models misalign incentives.
• Unoptimized pricing carries huge opportunity costs.
• Pricing is one of the biggest levers you can pull in your business. With asymmetric effects on profit and valuation.

Problem: At best, flawed pricing limits your ability to reinvest in growth. At worst, it misaligns incentives, causing stakeholders to work against one another.

Value-based pricing sets prices based on a customer's perceived value. This allows you to frame offers as investments instead of expenses.

Players

Pricing Models:

• Cost-Based - Setting prices by adding a percentage to costs.
• Competition-Based - What are my competitors charging? What's the market rate?
• Value-Based - How much is this worth to a client or customer?

Value Metrics:

Services:

• Recruiters: Percentage of a candidate's salary.
• Real Estate Agents: Percentage of a sale price.
• Personal Injury Attorneys: Percentage of a settlement amount.

SaaS:

• Amazon S3: Storage used
• Mailchimp: Number of contacts
• InvoiceBerry: Number of clients

Platforms (% of sales):

• Etsy: 5-8%
• Stripe: 2.9%
• Udemy: Up to 75%

Predictions

1. Dynamic pricing will become common. Boardfy optimizes prices in real-time.
2. Real estate agents, fund managers and financial planners will be disintermediated by software. See managed marketplaces, yield farming and robo-advisors.
3. Parity pricing and currency localization will become common. The latter correlates to 30-45% higher growth rates.

Opportunities

• Build authority by writing, speaking and curating. This leads to inbound demand and pricing power. Stewart Townsend built a 7,000-person following by sharing content.
• Buy businesses with unoptimized prices, optimize and shorten your payback period. See Micro Private Equity.
• Use social proof to boost perceived value. *Don't take my word for it, listen to them. *Tools like Testimonial.to and Shoutout showcase social proof.
• Find high-leverage ways to deliver value. Sales, recruiting and (ironically) pricing are "close-to-the-money." Results are measurable and valuable.

Key lessons

• Competition is a commoditizing force. Pricing power drops as competition increases.
• Value-based pricing forces clarity. What does success look like? What does failure look like? What will we measure? Cost-based pricing skips these questions.
• Value-based pricing forces first-principles thinking. Asking "why?" leads to core buying motives.

You may be thinking: "This sounds like a lot of work."
It can be. But price optimization provides asymmetric upside. I'm speaking to a future of decentralized networks with low switching costs.