TL;DR
- As you dive into the intricacies of setting prices for your SaaS product, keep in mind the six fundamental principles that are pivotal for crafting an effective pricing framework.
- Begin by acknowledging the importance of measurement; without it, you're flying blind in setting prices.
- Pricing is a reflection of value, not just a marker of costs, making it crucial to understand and leverage the perceived value of your offerings.
- The target audience for your product significantly influences your pricing strategy, underscoring the importance of customer segmentation.
- Strive for a pricing model that champions simplicity, transparency, and fairness. These qualities foster trust and clarity among your customers.
- Recognize that pricing is an ongoing journey, necessitating regular reviews and adjustments to align with market dynamics and customer expectations.
- Finally, differentiate clearly between pricing and billing—two critical yet distinct aspects of your business operations.
- Adhering to these principles for SaaS pricing positions your product competitively and ensures your pricing strategy contributes positively to your business's growth and customer satisfaction.
- Togai's event-driven architecture and customer management system enable real-time value tracking and flexible pricing customization.
When we looked across the internet for some guiding principles on how to price your software or SaaS product, we came up empty. There were multiple blogs and articles explaining the different types of pricing with examples. However, we were unable to get guidance on how one should be thinking about pricing. At the end of the day, pricing is a strategic function that cuts across different teams in your organization and hence, we decided to come up with a core set of 6 principles that can help you create your pricing framework.
Framework of Frameworks Specific to Software Pricing
1. You cannot price what you do not measure.
This is an obvious and straightforward statement, yet a powerful statement that has far-reaching implications. Most SaaS companies think of pricing as an afterthought. While willingness to pay conversations with your customers can help provide anecdotal evidence for your pricing strategy, you will miss out on the right pricing model unless you have a robust measuring system for your business from day 1.
It is essential to understand the value of what you offer to your customers. This value can be determined only by measuring the resources and efforts that go into producing and delivering your product.
One of the fundamental axioms of pricing is that you cannot charge more for a product or service than what it costs you to produce and deliver it. If you do not measure your costs accurately, you will not be able to determine your business model itself.
Measuring is also crucial when it comes to differentiating your products or services. By measuring the unique features and benefits of your offerings, you can better understand their value and position them accordingly.
In addition to measuring costs and unique features, it is also important to measure the value that your customers derive from your offerings. This needs to be done by qualitatively (conducting customer surveys) and quantitatively (tracking customer usage patterns). Understanding the value that your customers place on your offerings can help you to determine the optimal price point that maximizes revenue and profitability.
Pricing is always a tug-of-war between you and the market. Under-pricing leads to a loss in revenue, while overpricing drives away customers and reduces demand. The only way you find an inflection point that balances this is by accurately measuring everything (costs, usage, value) which then acts as inputs to formulate your pricing strategy.
So, how do you measure what matters accurately and reliably?
Togai is a purpose-built ingestion system that helps you track and measure all your business actions as events accurately through an event-driven architecture powered by a simple, intuitive dashboard that you can go live in under a day.
Also Read: Maximizing Product-Led Growth with Usage-Based Pricing: Why It's the Best Approach for Your Business
2. Pricing is a measure of value, not a singular point
Pricing is often seen as a straightforward calculation - simply determining the cost of producing and delivering a product or service, and adding a markup. However, pricing is much more complex and nuanced than that, as it involves taking into account a wide range of factors that determine the value that a customer places on an offering.
One of the key principles of pricing is that it is a measure of value, not a singular point. The physical world operates on the value being tangible and easily quantifiable. You are not going to pay for electricity or gas on a subscription basis. The era of the internet and software is a lot more abstract and hence the value is difficult to quantify. The price of a product or service should be determined by the value that the customer perceives it to have, rather than simply by its cost of production.
There are several factors that can influence the value that a customer places on a SaaS product. For example, the quality of the product, the level of support provided, the reputation of the brand, and the perceived uniqueness of the offering can all play a role in determining its value.
It is also important to recognize that value is subjective and can vary from customer to customer. This means that the same product or service may have different price points for different customers, based on the value that they perceive it to have. For example, a high-end branded product may be priced significantly higher than a similar product aimed at a more budget-conscious market, as the branded product is perceived to have a higher level of value.
The importance of pricing as a measure of value is further highlighted by the increasing use of dynamic pricing, which adjusts prices based on real-time data and customer demand. Dynamic pricing allows businesses to respond to changing market conditions and customer behavior, ensuring that prices remain in line with the value that customers place on their offerings.
How do you practice this principle?
The core of this principle is to understand the value every individual customer perceives from your product and understand that it is okay to price your product differently for different segments. Think Uber – they do not charge the same price even when there are 2 people choosing the same source and destination locations at literally the same time. This is an example of dynamic pricing that also uses the input of value perception to drive pricing.
Togai’s event-driven architecture provides the flexibility to instrument and meter your product in any way you see fit and understand the value that you provide to your customers in near real-time.
By recognizing that pricing is a measure of value and not just a calculation based on cost, you can ensure that their prices remain in line with the value that their customers place on their offerings.
3. Who you are pricing for matters as much as what you are pricing
When it comes to pricing a product or service, it is important to not only consider the cost of producing and delivering it, but also the target customer, in short, segmentation. You need to understand if your segments are 1-1 (every user/buyer of your product has a unique persona) or 1-many (there are a few combinations/cohorts of users/buyers who act similarly).
The target customer will have a significant impact on the perceived value of a product or service, and therefore on the price that they are willing to pay. It is also important to understand the buying behavior and preferences of your target customer. For example, a customer who is price-sensitive may be more likely to choose a lower-priced product, even if it is of lower quality, whereas a customer who is more concerned with quality may be willing to pay more for a premium product. Knowing your target customer will also help you to identify their pain points and the benefits that they are looking for in a product or service. This information can be used to tailor your offerings and messaging to better meet their needs and justify a higher price.
In addition to understanding your target customer, it is also important to consider their purchasing power. For example, a high-end product may be priced significantly higher than a similar product aimed at a budget-conscious market, but this may not be feasible if the target customer has limited purchasing power.
Does Togai help me with segmentation?
Togai’s customer management system handles multiple hierarchies and helps you create custom pricing for a customer, or group of customers or even have different pricing for multiple teams within a single customer organization based on the features they use.
4. Simplicity, transparency, and fairness in pricing are as important as predictability
Pricing can be a complex and controversial topic, and there is often a desire for predictability and stability in prices. However, the importance of simplicity, transparency, and fairness in pricing cannot be overstated, and these elements should take precedence over predictability.
Simplicity in pricing refers to clear and straightforward pricing structures that are easy for customers to understand. Complex pricing structures can confuse and frustrate customers, and may even lead to distrust and dissatisfaction. For example, a simple pricing structure that clearly outlines the cost of a product or service and any additional fees, such as overages, is more likely to be well received than a complex pricing structure with hidden fees and surprises.
Transparency in pricing means that customers can see the underlying factors that determine the price of a product or service. This helps to build trust and confidence in the pricing, as customers can understand the reasons behind the price. Fairness in pricing refers to the idea that customers should not be charged more for a product or service than it is worth, or more than similar products or services are sold for.
Fair pricing helps to build a strong reputation and loyal customer base, as customers are more likely to return if they feel that they have received a fair deal. For example, a fair pricing structure that considers the value that a customer perceives in a product or service, rather than simply the cost of production, is more likely to be well received and result in repeat business.
What customers want is clear, straightforward, and fair pricing structures that they can understand and trust. By focusing on predictability over simplicity, you could end up losing many customers when they are up for their contract renewal and if they do not see true ROI and fairness in your pricing.
Okay, simplicity and fairness are easy to say but hard to implement?
We, at Togai, are big proponents of consumption-based pricing models that get customers started for cheap (even free), and then you make money for the value delivered as against just based on annual contracts for shelfware. With Togai, you can easily implement and automate a pay-as-you-go pricing model for different customer segments at the click of a button.
5. Pricing is not a one-time effort
We have spoken to 100s of software businesses and >90% of them mentioned that pricing is currently a ‘set and forget’ model. However, this approach is not only inaccurate but also damaging to the business. Pricing is an ongoing process that requires regular review and adjustment to remain relevant and effective.
There are several factors that can influence the price of a product or service, including changes in the cost of production, changes in the market, and changes in customer demand. Regularly reviewing and adjusting prices in response to these changes is essential to meet the needs of your customers.
In addition, pricing should also be reviewed and adjusted in response to changes in customer preferences and behavior. Understanding changes in customer preferences and behavior and adjusting prices accordingly can help businesses remain relevant and effective.
Regular pricing reviews also provide an opportunity to test and refine pricing strategies, allowing businesses to experiment with different pricing structures and tactics to determine the most effective approach. This can help businesses to stay ahead of the competition and remain relevant in an ever-changing market.
You spend so much effort into improving your product continuously and solving more problems for your customers. When you use a ‘set & forget’ approach to pricing, you are actually creating a perception that your product is not improving as well. Pricing needs to be a continuous effort, not just to capture more value that you create, but also to ensure that your customers understand the value you are creating for them and signalling it with your pricing model.
I know Togai will be able to solve this, but some details would help.
Togai provides you with the capability to simulate pricing for your customers and understand the business implications – your revenue, and your customers’ costs. By enabling you to use pricing as a lever to grow your business, we effectively help every product manager in a software company make data-driven decisions about pricing. If you are part of the finance team, rest assured, that we help you use pricing to make your role a strategic function and not an operational one. We empower developers to not worry about building boring billing systems for every pricing model that your product manager comes up with.
6. Pricing is not billing
Pricing and billing are two separate but related concepts that are often confused. While they may seem similar, they are distinct processes with different purposes and implications for businesses. Understanding the difference between pricing and billing is essential for effective pricing strategies and profitability.
Pricing refers to the process of determining the value of a product or service and setting the price that customers will pay for it. Pricing involves considering factors such as the cost of production, market demand, and customer preferences to determine the optimal price for your product. Pricing is an ongoing process that requires regular review and adjustment in response to changes in the market and customer behavior.
Billing, on the other hand, refers to the process of charging customers for a product or service and collecting payment. Billing is the final step in the sales process and involves generating invoices, processing payments, and managing customer accounts. Billing is an important aspect of the business, as it provides a source of revenue and helps to manage cash flow.
The distinction between pricing and billing is important, as pricing has a direct impact on the success of a business, while billing is simply a means of collecting payment. A well-designed pricing strategy can help to improve profitability, while a well-designed billing system can help to manage cash flow and improve efficiency.
In short, pricing is a strategic lever that helps you increase your top line and bottom line whereas billing is an operational lever that helps you save time and improve efficiencies.
Okay, I am sold on Togai. Let me try and pitch the value here: Togai is an end-to-end metering and pricing platform that uses usage data to drive my top-line and bottom-line growth without worrying about the operational aspects of building billing systems for each of my strategic choices around pricing.
