How to Price your SaaS Product
Author: collin stewart
Ajit Ghuman has been a product marketing leader since 2013, but he really landed on pricing as an area of expertise when working for his current company, Narvar. As he started to work on a new pricing strategy for the platform, he realized that it was more an art than a science, and one that he was not familiar with. He began to call all the other product and marketing leaders that he knew for their advice, and quickly learned that there was no real resource out there designed to help people decide on the best pricing strategy for them. So, after many conversations, many notes, and much research, Ajit developed his own philosophy on pricing SaaS products, and he decided to write the book on it.
- Pricing is hard
Newsflash: it’s not. A lot of business leaders go to grad school or undergraduate business school and learn many analytical techniques that they feel they need to apply when setting pricing. Ajit explains that this isn’t the case. Approaching pricing from an overly analytical perspective prevents a lot of leaders from thinking about it in a simple, step-by-step fashion, that will actually help them land on a better pricing structure.
2. Pricing = price point
A CEO will say things like “that prospect didn’t buy because they didn’t like the price point” or “they went with a competitor even though they had a higher price point.” This reveals a fundamental lack of understanding about where pricing sits in the hierarchy of things. Pricing actually sits at the very top of a pyramid whose base is built by strategy, then positioning, then packaging, with price point (X dollars times Y unit metric) being the final, tiny piece.
The first, most common question Ajit gets from leaders when it comes to setting pricing is why? Why is it important? His answer is: leverage. If you are better able to align pricing with your prospects, you will see considerable increases in revenue and sales efficiency, often at the same time.
The next question startups and SMEs ask Ajit is this “should we set pricing in-house or find a consultancy to do it?” In Ajit’s opinion, you should try to do as much of the thinking and execution in-house as possible. The actual pricing operations can be done later. Pricing is highly dependent on how you’re communicating the value of your product to your prospects, and, generally speaking, only people inside a company understand its unique value proposition and positioning in its market. Consultants coming in from the outside will have robust portfolios of tools and techniques, but they’re going to be weak on your customer, your market, and your value proposition. As a result, Ajit’s worry is that a consultant solves for local rather than global optima. You have to solve pricing from the root, and no one knows the root of a business better than its leaders.
Ajit also gets some more specific questions such as “what’s the best pricing structure?”, “should we have 2 or 3 tiers?”, and “should we price per user or per API call?”. But if these are the questions you’re asking, Ajit thinks you’re on the right track.
SETTING PRICING FROM THE GROUND UP
When thinking about pricing, Ajit recalls a scene from Martin Scorsese’s Wolf of Wall Street in which Matthew McConnaughey’s character, Mark Hanna, tells Leonardo Dicaprio’s Jordan Belfort “Fugayzi, fugazi. It’s a whazy. It’s a woozie. It’s fairy dust.” And he’s right. If you can find the right customer and make them see your value, the pricing is irrelevant. You just have to build your pricing strategy correctly from the ground up.
- Product Value
You can create an ROI calculator or anything else that will help them visualize, but value resides in the mind of the prospect. If you can build a strong brand, weave a powerful narrative, and position your product or features well, that’s where value is established. Pricing is just how you extract a portion of that value and bring it back to your company. Think of the iPhone. Because of its strong positioning, we’ll pay more for the android, despite its virtually identical list of features. So, make sure you have confirmation within your company that you understand your customer, you understand their pain points, and you are uniquely solving the problem better than your competitors or alternatives. This will set you up for success in the next 2 tiers of the pyramid.
* Make sure you have PMF. This is more applicable to early-stage startups, but you need to know this before you can move up the pricing strategy pyramid. Once you’re repeatedly selling the same type of solution to the same type of customer, you have it. If your sales are patchy, you can’t define your ICP, and you’re getting different types of customers every day, you don’t. To uncover market fit: if your market is broad, use surveys to assess fit, perception, and awareness of your brand. If you are in the b2b space you can hypothesize on fit and then speak to 20+ people to validate if you’re on the right track. These are not pricing strategies, they are the basics of the GTM strategy, but you have to fix the basics before you can move forward.
Think about a Mustang. There are many versions of the iconic car. There’s the standard, 4-cylinder model that just about every Tom, Dick, or Harry can afford. Then there’s the 2020 Mustang GT500 which will set even the wealthy back a pretty penny. What Mustang did was look at the market as a whole, segment it, and build a product for each type of customer. A larger set of the population will be happy with the 4-cylinder, ~$26,000 USD Mustang. A smaller set of niche customers will want something more, like the $1.1M USD 2020 GT500, and they’ll be willing to pay for it.
SaaS companies do the same thing when they set multi-tier pricing (ie pro, platinum, and elite plan). For a car company, this is difficult because they have to manufacture special parts. For software, it’s simple. You can almost give the same product away at a cheaper price for your consumer or SME segment, and add in a few specialist features for the enterprise package. But, you have to be careful with packaging. If you provide too many options to your consumer/SME segment, they may not resonate with the plan, even if it’s cheap, because they feel it has more than they need. Conversely, an enterprise customer won’t be willing to talk if they don’t see a certain set of features typical of an enterprise package.
* If the package is not built perfectly, your customer will not see the value.
Now that you’re at the top of the pyramid – pricing – you still can’t jump right into setting your price point because there are a couple of things you need to consider first. For software, especially subscription software, there are pricing metrics. In the old days, you had perpetual license models for on-premise software, but now everything is cloud-based. You can charge per seat, per API call, or whatever unit metric you wish to choose depending on your solution. This choice needs to be a conscious one because the right pricing metric can bring in 10x more revenue than another.
In Ajit’s last company, Helpshift, for example, pricing was originally set per seat. Helpshift is a customer service product for companies which have mobile apps. Mobile apps, however, especially ones in the gaming industry, have few customer service agents but millions or tens of millions of users. After Ajit’s input, Helpshift charged per 100,000 monthly active users instead. By aligning pricing with a metric that a product manager at a gaming company would be excited about, Helpshift was able to increase revenue by 10x.
PRICING ON YOUR WEBSITE
Ajit sees a post on LinkedIn every second week from marketers saying “stop hiding your pricing on your website.” But Ajit doesn’t believe this applies to all companies. If you’re targeting global 2000, for instance, he sees little value in publishing pricing because of a phenomenon called price discrimination. Every type of company has different amounts they’re willing to pay for a solution, and if you publish pricing on your website, you pigeonhole yourself. Out of that global 2000, the Fortune 500 companies might be willing to pay 5x more than the rest. You lose leverage when you post pricing.
On the opposite end of the spectrum, if you’re selling a consumer product or transactional b2b product and you want as much of the market as you can get, you should post your pricing to reduce friction.
You can also establish a middle ground where you detail packaging but ask people to reach out for pricing, or where you publish pricing for your “good” package and ask people to reach out to learn about pricing for your “better” and “best” packages.
Pricing for a SaaS product can be both overcomplicated and oversimplified. It doesn’t take the deep, academic analysis leaders are taught in business school, but you also can’t bang it out in a weekend. But it needs to be built from the ground up, starting with value, then packaging, and ending with pricing aligned to the right unit metrics that your customer will understand and value. Just remember: people will pay anything if they really see the value and, in the words of Mark Hanna, “it’s Fugayzi, fugazi. It’s a whazy. It’s a woozie. It’s fairy dust.”
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Jon is a pioneer in the customer management category. He was the creator and co-founder of the award-winning customer management product GoldMine, acquired by FrontRange in 1999. After many years observing the CRM market, he created Nimble, an award-winning social sales and marketing CRM for individuals and teams that is Ranked #1 in Overall Satisfaction by G2 Crowd.
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