SBI just put out a nice report on the proper way to price SaaS products. The full link to the full report is here.
Our favorite observations are also summarized here, verbatim.
Don’t price based on competitors. “67% of SaaS companies ignore value-based pricing, according to our latest 2024 State of SaaS report and research. They invest heavily in competitor-led or cost-plus pricing — and miss out on revenue opportunities as a result.”
Do an internal audit. An internal pricing audit means understanding your CAC, understanding who the ICP is and why they stay and upgrade, discounting and why your team does it, and finally the ROI your product provides the customer.
Interview the ICP. “Only your customers can tell you the real value of your product. Your pricing team must ask the right questions to the right buyer personas to uncover their perceived value and willingness to pay….. Reach out to these personas directly to gather data on their product usage behavior and what features, services and outcomes they value the most (and least) from your product.”
The questions: “Ask each buyer persona at what price they would consider the product: i) So expensive they would not buy it? (Too expensive) ; ii) So cheap they feel the quality couldn’t be very good? (Too cheap); iii) Is starting to get expensive, so they would have to give some thought to buying it? (Expensive/High Side); iv) To be a bargain — a great buy for the money? (Cheap/Good Value).
Price around the ‘value metric.’ “For example, if all customers love your widgets, your pricing tiers should focus on how many widgets customers can use until they have to upgrade their plan. This way, larger companies pay more than smaller companies (and you maximize revenue). Make sure your value metric is clear and easy to grasp, so prospects immediately understand what they would be paying for and where they fit in your packaging.”
Test. “Use data-driven experiments to validate (or invalidate) individual hypotheses at a granular level, so you can drill down into the best possible pricing solutions (but don’t try and test everything at the same time)….. Use minimum viable tests rather than large surveys or samples that take time and effort.”
Do not A/B Test. “The sample size of an A/B test will likely lead to insignificant results and you run the risk of damaging the relationship with the customer that pays a higher price.”
Re-evaluate pricing regularly. “Ensure you re-evaluate your pricing approach and make changes every six months (or whenever your product changes), so it remains fit for purpose.”
The entire post is well worth the read. Thank you SBI for putting the data out.
Thank you for your readership. See more blogs and SaaS data at blossomstreetventures.com. Email the author at sammy@blossomstreetventures.com.