Pricing Strategy

How Does Economic Value to the Customer (EVC) Analysis Guide SaaS Pricing Strategies?

Shad Super

• 2 min read

Summary

Economic Value to the Customer (EVC) analysis helps guide SaaS pricing strategies by determining the maximum price a customer is willing to pay based on the value they perceive from the product compared to alternatives. This analysis informs pricing decisions by focusing on customer-centric value propositions, competitive positioning, and pricing tiers that reflect diverse customer segments. Here's a comprehensive guide on how EVC can be integral to SaaS pricing strategies.

Understanding Economic Value to the Customer (EVC)

Economic Value to the Customer is a pricing method that estimates the value a product or service provides to a customer compared to the next best alternative. It takes into account both tangible benefits (such as cost savings) and intangible benefits (such as convenience or brand trust). By quantifying these benefits, businesses can set a price that reflects the value delivered, rather than just the cost of production.

Components of EVC Analysis

Tangible Value Calculation

Tangible value involves quantifiable savings or gains realized by the customer. For example, if using a SaaS product saves a client $10,000 annually in operational costs, this amount contributes directly to the economic value.

Intangible Value Consideration

Intangible value includes factors such as improved user experience, brand prestige, or enhanced security features. These elements, while harder to quantify, are crucial in determining the value perception from the customer's perspective.

Application of EVC in SaaS Pricing Strategies

Value-Based Pricing

EVC supports value-based pricing by aligning the product price with the perceived value to the customer, rather than cost-plus or competitive pricing models. This approach allows SaaS companies to capture more value by focusing on customer benefits. For instance, a SaaS tool that increases productivity by 50% might be priced higher due to its substantial impact on business efficiency.

Segmented Pricing and Tiers

With EVC, SaaS providers can develop pricing tiers that cater to different customer segments, each with unique value perceptions and willingness to pay. For example, basic, professional, and enterprise tiers could have varying features and price points reflecting the distinct value each segment derives.

Competitive Positioning

EVC analysis helps in competitive positioning by highlighting unique value propositions that differentiate a SaaS product from competitors. By understanding the specific economic value compared to alternatives, a SaaS company can strategically position its offering in the market.

Examples of EVC in SaaS Pricing

An example of EVC in action is Salesforce, which uses a value-based pricing model that scales with the size and needs of its customers. By offering different editions (Essentials, Professional, Enterprise, and Unlimited), Salesforce captures diverse EVC metrics linked to company size, revenue potential, and deployment complexity.

Challenges and Considerations

Accurate Value Estimation

One of the main challenges is accurately estimating the value perceived by the customer, especially with intangible elements. Businesses must invest in understanding customer needs and preferences through surveys, interviews, and data analytics.

Market Dynamics

Market changes can affect the perceived value and competitiveness of a SaaS product. Continuous monitoring of industry trends and customer feedback is necessary to adjust pricing strategies accordingly.

Scalability

SaaS companies must ensure that pricing strategies based on EVC are scalable across different markets and customer bases, which requires sophisticated pricing models and analytics.

References

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