Your business model describes how you create, deliver and capture value. Much time and effort are spent defining the value proposition: the added utility you create for your customer by solving their job-to-be-done. If the job is important enough and your solution effectively enhances their gains or alleviates their pains, your customer will say “yes” to investing their money and attention with you.
However, founders flounder when considering how to capture this added value through revenue streams. The primary consideration becomes to enhance recurring revenue metrics through subscriptions, commissions and markups. Pricing seeks to underbid the alternatives or is set arbitrarily, hoping the customer will pay with minimal protest. Strategies are established without understanding how the customer perceives the value you offer. This means that you leave cash on the table by not recognizing the real value you add.
Before setting prices, understand your Profit Proposition
Before considering your pricing structure, you need to understand your Profit Proposition. If your Value Proposition is the benefit you offer your customer, then the Profit Proposition is how your customer assesses the utility of your Value Proposition. Understanding your Profit Proposition provides you with a solid foundation to establish a pricing strategy that supports your margin, or the difference between what you charge for your offer and how much it costs you (fixed, variable and marginal costs).
You cannot price effectively if you do not understand how you will generate profit. SaaS companies often have very weak profit propositions because they price arbitrarily, focusing on quickly gaining a customer base to leverage future funding rounds, even when losing money on each transaction. You cannot lose money on each trade, hoping to earn money at scale.Continue reading