There are several pricing models that exist out there and I thought it might help our business discussions to look at them and to highlight the biggest difference between cost-based and value-based pricing.
The most simple of cost-based pricing approaches is to simply charge a single price. It’s also the one that most people are used to—like when you walk into a store, grab a product, and it has a single price tag on it.
If your production costs are clear, and your margin determined, then a flat price may not give you the best profit, but at least it’s very consistent.
Because not all customers are the same, it can make sense to create multiple price points for your product—driven by a customer’s perceived value.
We’ve all landed on pricing pages that show us pricing for the individuals, small businesses, and enterprises. That’s tiered pricing, and it’s often based on making additional features available but can also be based on how much you use or need the product.
Not to be confused with usage pricing, an example of this use-based pricing is that you might notice tiers that change how much disk space comes with each tier. Those with large needs pay more.
Like tiered pricing, this approach ends up with varied pricing based on how people use your product. But it’s more transactional in nature.
For example, take the price of video transcription—which might be $1 or $2/min. The total price is dependent on how many minutes you transcribe.
Last on my list is user-based pricing, which isn’t for everyone but is another kind of variable price. It’s based on a different cost—the cost that you incur for each user that uses your product.
This can be very lucrative for products that are used by teams, but it can also create its own barrier to entry as prospects figure out how to limit the users of your product (not a good thing), just so they don’t have to pay more.
WordPress Plugins and Themes
Not all of these approaches work for WordPress plugins and themes, but many are options. And if your plugin is a hybrid that also comes with a hosted portion—like Cart66—then even more of these may be applicable.
But before you rush off to adopt a cost-based approach to pricing, you should know what the main difference is between cost-based approaches and value-based approaches.
It’s a Matter of Orientation
When you work on any cost-based approach to pricing, you start by figuring out your own costs. You ask how those costs change based on how customers interact with your product. You gather all those costs, sum them up, average them out, and add some margin.
But notice what you start by doing.
You start by looking at yourself. You start by looking at your own company. You start by focusing inward. And only later, after you’ve added profit and come up with a price, do you start looking out to your customers.
Value-based pricing starts looking in the opposite direction from the start. It starts by looking outward to clients. And in understanding the value they place on getting things done.
Only after that, does it look inward.
If WordPress organizations are going to have success, my take is that they will have to get good at looking out before looking in.
And that’s challenging as so many developers have been taught that product development starts with scratching an itch. But that normally translates to more inward focus, as they start by scratching their own itch, not one they’ve seen in the market.
Our shift to value-based pricing should actually start long before we have to price anything. It should begin as we start thinking about new product development.
Instead of looking in all the time, we should start by looking outside, and only later working our way inside.
What are your experiences with different types of pricing?
Chris Lema is the VP of Software Engineering at Emphasys Software, where he manages high performers and oversees product development and innovation. He’s also a blogger, ebook author and runs a WordPress meetup in North County San Diego. His coaching focuses on helping WordPress businesses, or businesses wanting to leverage WordPress.