These are the 7 commandments of SaaS Pricing, at least according to Blossom Street.
1. Review pricing often. Assign a designated leader or group that owns pricing and product packaging. Meet no less than quarterly, and while you don’t have to make changes, you do have to have a robust reasoning as for why the pricing is where it is.
2. Changing pricing means changing packaging. Just changing 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 your offering? What features or products are in each tier? If there is a usage or transaction based component, is it still structured appropriately? Etc.
3. Not all pricing inputs are good. The most common inputs into pricing research are competitor pricing (bad) and current customer feedback (very good). Relying on competitors is highly circular and should not be a guide. Your SaaS offering should be unique and differentiated enough to where the competitor pricing is far less relevant. A quote we liked on the topic from Price Logic: “If you look at the most common pricing strategies by annual revenue, we see that more mature companies shift both to value-based pricing and product-led tactics. Large companies are most likely to employ value-based pricing, because they have the most resources to do the proper research to figure out their value.” As soon as you have enough customers in the ICP to do real research on the customer base, do it. Talk to your customers frequently, on the phone.
4. Issues with basing pricing on competitors. Again from Price Logic: “The problem with competitive pricing is that you are putting a higher value on your competitors than your customers. Your customers don’t care about your competitors, they care about you. It often leads to or shows a lack of product differentiation meaning you and your competitors are interchangeable and you risk turning products into commodities. Instead of being able to articulate the unique value of your product, and position yourself better for certain user segments, you’re only able to articulate how your products are different in price to your competitors.” And of course if your competitors are using your pricing as a guide, which they may be because value based pricing requires real work, then it’s the blind leading the blind.
5. Value based pricing sets prices according to what consumers think your product is worth, with a significant discount. This is obvious to say, but very hard in practice to pull off: your product needs to be priced so that it is a very compelling value proposition to the customer. That means figuring out what the value to the customer is, and making sure your pricing delivers significant ROI to that customer. From Price Logic: “By placing a premium on the opinions of your customers and buyers, you are focusing on the people who will eventually be deciding if your pricing and packaging is correct. Vale based pricing forces you to differentiate yourself from competitors and be able to articulate that difference in everything from your product development to your messaging. It requires that you understand how your customers get value from your product. This puts you in a better position to deliver on that value, acquire customers and retain them.”
6. How to do value based pricing: Again this is super easy to say, but takes a team and real leg work with the customer to figure out: i) identify the ICP based on net dollar retention; ii) talk only to the ICP about what they value the most, how they measure ROI on your product and other SaaS products they use, what their perceived ROI is on your product and their top SaaS products (while it is not ok to look at competitor pricing, it is very important to look at the ROI of other SaaS products 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 unit basis, for instance is it Value Per User, Value Per GB of Data Used, Value per Transaction, etc; iv) price your product such that the value metric in the previous bullet is 20x+ what the customer actually pays you. While that may sound high, it’s not: think about the ROI you get on your email suite or Microsoft Office. It’s well over 20x.
7. You cannot just rely on Customer Success. While the 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 with regularity as well, and compare that data to what the CS team is also discovering.
Thank you for your readership. See more blogs and SaaS data at blossomstreetventures.com. Email the author at sammy@blossomstreetventures.com.