These are the 7 commandments of SaaS Pricing, at least according to BlossomStreet.
1. Review pricing often. Assign a designated leader or group that ownspricing and product packaging. Meet noless than quarterly, and while you don’t have to make changes, you do have tohave a robust reasoning as for why the pricing is where it is.
2. Changingpricing means changing packaging. Justchanging the price of the offering itself is too basic. You need to review what is in the offering. For instance, should there be three tiers of youroffering? What features or products are in each tier? If there is a usage ortransaction based component, is it still structured appropriately? Etc.
3. Notall pricing inputs are good. Themost common inputs into pricing research are competitor pricing (bad) and currentcustomer feedback (very good). Relyingon competitors is highly circular and should not be a guide. Your SaaS offering should be unique anddifferentiated enough to where the competitor pricing is far lessrelevant. A quote we liked on the topicfrom Price Logic: “If you look at the most common pricing strategies by annualrevenue, we see that more mature companies shift both to value-based pricingand product-led tactics. Large companiesare most likely to employ value-based pricing, because they have the mostresources to do the proper research to figure out their value.” As soon as you have enough customers in theICP to do real research on the customer base, do it. Talk to your customers frequently, on thephone.
4. Issueswith basing pricing on competitors. Againfrom Price Logic: “The problem with competitive pricing is that you are puttinga higher value on your competitors than your customers. Your customers don’tcare about your competitors, they care about you. It often leads to or shows a lack of product differentiationmeaning you and your competitors are interchangeable and you risk turningproducts into commodities. Instead of being able to articulate the unique valueof your product, and position yourself better for certain user segments, you’reonly able to articulate how your products are different in price to yourcompetitors.” And of course if yourcompetitors are using your pricing as a guide, which they may be because valuebased pricing requires real work, then it’s the blind leading the blind.
5. Valuebased pricing sets prices according to what consumers think your product isworth, with a significant discount. This isobvious to say, but very hard in practice to pull off: your product needs to bepriced so that it is a very compelling value proposition to the customer. That means figuring out what the value to thecustomer is, and making sure your pricing delivers significant ROI to thatcustomer. From Price Logic: “By placinga premium on the opinions of your customers and buyers, you are focusing on thepeople who will eventually be deciding if your pricing and packaging iscorrect. Vale based pricing forces youto differentiate yourself from competitors and be able to articulate that differencein everything from your product development to your messaging. It requires thatyou understand how your customers get value from your product. This puts you ina better position to deliver on that value, acquire customers and retain them.”
6. Howto do value based pricing: Again this is super easy to say, but takes a team andreal leg work with the customer to figure out: i) identifythe ICP based on net dollar retention; ii) talk onlyto the ICP about what they value the most, how they measureROI on your product and other SaaS products they use, what their perceived ROIis on your product and their top SaaS products (while it is not ok to look atcompetitor pricing, it is very important to look at the ROI of other SaaSproducts your ICP uses), how easy or hard it is to understand your value proposition,etc; iii) break down the value derived by the ICP to a unitbasis, for instance is it Value Per User, Value Per GB of Data Used, Value perTransaction, etc; iv) price your product such that the value metric in the previousbullet is 20x+ what the customer actually pays you. While that may sound high, it’s not: think aboutthe ROI you get on your email suite or Microsoft Office. It’s well over 20x.
7. You cannot just rely on CustomerSuccess. Whilethe CS team should be talking to customers about pricing and asking questions,you cannot just take only their answers as your body of research. C-suite employees must talk to the ICP withregularity as well, and compare that data to what the CS team is alsodiscovering.
Thank you for your readership. Seemore blogs and SaaS data at blossomstreetventures.com. Email the author atsammy@blossomstreetventures.com.