This is the free version of Trends PRO #0051 — Value-Based Pricing
💎 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.
💡 Solution
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.
- Financial Planners • Percentage of assets under management (AUM).
- Fund Managers • Percentage of AUM and gains above a hurdle rate.
- SaaS
- Amazon S3 – Storage used
- Mailchimp – Number of contacts
- InvoiceBerry – Number of clients
- Productized Services
- Penji – Number of users
- A4E – Monthly expenses
- ContentFly – Number of words
🔮 Predictions
- Dynamic pricing will become common. Boardfy optimizes prices in real-time.
- Real estate agents, fund managers and financial planners will be disintermediated by software. See managed marketplaces, yield farming and robo-advisors.
- 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.
😠 Haters
“This sounds like a lot of work.”
It can be. But price optimization provides asymmetric upside.
“There are more compensation models for financial planners, fund managers, etc.”
Those are examples. Trends.vc reports are less than 1000 words. Google is your friend.
“Financial planners will be disintermediated?! What about the human touch?”
Software is eating the world. And software is eating software. Exceptions almost always exist.
“Price gouging is a real problem when competition is suppressed.”
Absolutely. I’m speaking to a future of decentralized networks with low switching costs.
🔗 Links
- How did you decide on prices? • The tweet behind this report.
- The skills you really want can’t be taught • Naval on escaping commoditization.
- Trends #0023 — Personal Brands • On building on monetizing authority.
🙏 Thanks
Thanks to Natwar Maheshwari (Mailchimp), Jeremy Abraham (Spiffy), Vik Duggal (Consulting Club), Wit Sumathavanit (Builders’ Sun), Yuriy Yarovoy (Warrior Made), Daniel Wulf (Wurst Circle), Ali Alsayed, Stuart Sim (FinLister), Neeraj Hirani, Uwe Dreissigacker (InvoiceBerry) and Shashank Agrawal. We had a great time jamming on this report.
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With Trends Pro you’ll learn:
- (📈 Pro) Who went from making $100/hour to $15,000/week?
- (📈 Pro) How to build brand equity?
- (📈 Pro) How do cognitive biases affect pricing?
- (📈 Pro) What’s negative churn?
- (📈 Pro) How to reach negative churn?
- (📈 Pro) What’s product-market-pricing fit?
- (📈 Pro) When are price and value positively correlated?
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- (📈 Pro) How does pricing affect perceived value?
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