Pricing SaaS products the right and wrong way
PriceIntelligently.com puts out phenomenal content on how to price your SaaS product. Below are our biggest takeaways on pricing from one of their reports.
Don’t use competitors’ pricing as your basis. “the biggest downside of competitor based pricing should be obvious. You don’t have your pricing strategy, you have their pricing strategy. Your company exists to offer customers something different to what is already on the market. You are offering more value and a better product, otherwise you shouldn’t be building it.” The other problem with this approach is “it is also static, with no chance of adding value by raising prices without pricing yourself above your competitors. The moral of the competitor-based story is look, but don’t touch. You want to know where your competitors are pricing their products so that you’re in the same ballpark, but they should not be guiding your decisions.” Pricing based on competitors is also a race to the bottom.
Value based pricing is the way to go. “This could easily be called “Customer Based Pricing” because that is effectively what it is. Instead of looking inwardly at your own company, or laterally towards your competitors, with value-based pricing you look outward. You look for pricing information from the people who are going to make a decision depending on your price: your customers. By placing a premium on the opinions of your customers, you are focusing on the people who will be making the buying decisions. They are the ones that will eventually be deciding whether your pricing and packaging is correct. If not, they won’t be buying.” In addition to asking your customers outright about the value derived from your product in either cost savings or revenue improvements, you should look at data available to you such as number of users, usage per user, etc.
Value based pricing allows you to raise prices. As you learn more about the customer and understand the value you are adding, you will determine the appropriate time to raise prices and by how much. Pricing should be reviewed at least every 6 months.
Clone your best customers. “You clone your customers by finding out as much information as possible about them, then reaching out to similar people or organizations through your outbound sales process. But you can’t do this if you have no idea who your customers are in the first place. Finding out as much detail as possible about them is crucial to segmenting and replicating them.” Focus on 4 identifiable personas, and then offer a pricing plan and feature package for each of those 4. The highest plan should be blank and instead just say “Contact Us”. You want to be in touch with your highest value customers, and they will expect the additional consultation and support.
Ask your 4 personas the right questions. “What is the one thing you couldn’t live without and the one thing you could live without? What integrations are most important to you? What type of analytics do you do? Is support critical or does your organization prefer to self-solve problems? At what price are we too cheap? At what price are we too expensive? At what price are we a bargain?“
Pricing on a per user basis may not be for you. “One of the biggest mistakes we see SaaS companies making is defaulting to per user value metrics. But about 8 out of 10 companies using per user pricing should be using a different value metric, simply because their products probably don’t provide more value with additional users, so charging for them doesn’t make perfect sense.”
Shoot for 3:1 LTV to CAC, at least. Ideally you’re break even on the customer within the 2nd year and your LTV to CAC is much higher than 3:1. “Because customer acquisition costs are paid upfront, but SaaS revenues accrue over time, this leaves any company following the SaaS model with an initial cash shortfall while they pay back the CAC.”
Shoot for the customer’s ROI to be >20:1. That’s right. Make sure the customer is experiencing an ROI of at least 20x the cost of your product. That may sound high, but look at Microsoft Office as an example: they charge a user $80 a year, but it’s a product that users would pay many times that to keep.
Do not A/B test. “A/B testing is fundamentally improvement through guesswork. When a page as sensitive as your pricing page changes based on guesses, you’re going to annoy the hell out of your customers.” You probably don’t have enough customers to pull this off anyways. “A/B testing is a highly effective way to optimize landing pages, design choices, and other site elements when you know the problem you’re solving for, but not pricing.”
Don’t discount. It cheapens the product, becomes permanent, and gets you customers that are more likely to churn. In addition, you’re bastardizing all the pricing analysis you just did by discounting.
Thank you for your readership. See more blogs and SaaS data at blossomstreetventures.com. Email the author at sammy@blossomstreetventures.com.
