TL;DR
- Maximizing your SaaS business growth requires a strategic approach to pricing, far beyond mere customer acquisition.
- Understanding the perceived value of your product to customers is key to setting a price that reflects its worth and boosts growth.
- Utilize customer data to inform pricing decisions and better understand buyer personas.
- Regularly revisiting and experimenting with your pricing strategy can uncover untapped growth opportunities and lead to significant gains.
- Creating a pricing model that offers flexibility and options can meet diverse customer needs and drive higher revenue.
- Pricing experimentation leads to a better understanding of price elasticity and customer preferences.
- Steer clear of common pitfalls like underestimating the importance of pricing or failing to align prices with customer value perception.
Pricing is a crucial but often underutilized growth lever. Rectify your mistakes when it comes to pricing and get back on track for sustained growth
The SaaS industry has expanded by around 500% over the past seven years. According to Gartner, it is worth approximately $172 billion. If you look at some of the largest publicly owned SaaS companies per market cap, their growth is tremendous. Take Shopify, for example. Its valuation in 2021 was $185 billion, growing 225% in 20 months.
But achieving such growth is no easy feat. It takes years for SaaS businesses today to become a unicorn. So is there a secret recipe for experiencing exponential growth? Today, with a recession right around the corner, companies should think about how they can grow through the downturn. What are some opportunities for growth they have overlooked?
If you search for 'SaaS growth levers' or 'strategies for growth', Google will give you numerous suggestions. Some articles suggest traditional growth levers like digital advertising and expanding your sales team. While others might cite diversifying product offerings and keeping your customer acquisition cost (CAC) competitive will help you grow. No doubt, all these are some crucial levers. However, I believe there are many overlooked and underrated sources of growth opportunities. One such opportunity is your pricing!
“[While] you obviously need to acquire customers, your pricing growth lever is actually 7.5x more powerful for growth.” — Patrick Campbell, founder & CEO of ProfitWell
Businesses leave money on the table when they don't put enough thought into their pricing. Most companies only spend an average of 6 hours a year thinking about their pricing while customer acquisition and other levers are often the primary focus for growing their business. However, according to a study by Profitwell, 512 SaaS companies showed monetization was 4x more efficient than acquisition in improving growth and 2x more efficient than efforts to improve retention.
Image credits: ProfitWell
For relatively little effort, you can see immediate growth. So it is pertinent that you don't miss this opportunity.
[While] you obviously need to acquire customers, your pricing growth lever is actually 7.5x more powerful for growth.” — Patrick Campbell, founder & CEO of ProfitWell
Advantages of an effective pricing strategy
A solid pricing strategy has several benefits:
Denotes high value
Why do many choose to buy an iPhone? They associate the brand with high quality and are willing to pay for it. Prices higher-than-usual to denote the exclusivity of a product. Gauging the perceived value to the customer and charging accordingly will benefit business growth.
Convinces potential buyers
While a higher price point is translated as high value, we should also keep in mind that if your price is too high, the customer may not be able to afford it. The price should be set at a level that convinces your customers to buy your offerings over your competitors. Companies offer tiers in their pricing so potential customers can customize the product or service to their needs, thus improving the conversion rates and growing their customer base.
Navigate volatile market circumstances
An effective pricing strategy will help you account for the changes in the business and market and help you decide where you need to make adjustments. It will take into consideration the customer and competitor insights and enhance one’s agility to react to market conditions.
Also Read: How to develop a holistic SaaS pricing strategy
Most common mistakes when it comes to B2B pricing
Basing pricing on your competition's pricing
"When deciding your pricing, don't base it on your direct competitors' price: base it on the value you are providing to your client (in terms of added revenue or reduced costs, including the cost of time)." — Nicolas Jacobeus, CEO/Founder, Scale
While you must keep an eye on how your competitors are pricing their solutions, determining your pricing solely on the competition is not a good idea. Lower prices can be viewed as synonymous with substandard quality. And that's the last thing you would want your customers to think. This doesn't mean you can't offer lower prices than your competitors. It means you shouldn't radically price your offerings lower and offer unwarranted discounts. If your intention is to improve customer satisfaction, discounts are not the way to go. Customers tend to expect discounts, and this conditioning is difficult to reverse. Instead, appeal to the customers with the value you would provide and charge them accordingly.
Not having complete buyer personas
Who your potential customers are, what they want (feature preferences), and what they are willing to pay—these are significant pieces of information to know before you make any pricing decisions. Often, SaaS companies don't have a full picture of their buyer personas. That's why you need to segment your customers (depending on the type of business, your product analytics could inform if your segmentation is trait-based, needs-based, value-based, or others). By combining these elements with your product analytics, The insights derived will help you effectively appeal to multiple kinds of personas.
"Pricing needs to be thought about through a framework that is customer focused. Too many companies sit in a room and simply guess and check to come to their pricing, which inevitably leads to a significant amount of money being left on the table. Instead, your research framework should leverage data collected from your target customers to “quantify” your buyer personas and understand who they are, what they want, and ultimately how much they're willing to pay for what they want from your product. Utilizing this type of customer data prevents you from selling the wrong product at the wrong pricing, which leaves an enormous amount of cash on the table." —Patrick Campbell, CEO, Price Intelligently
Thinking of pricing as a one-time activity
Pricing doesn't get the attention as, say, marketing and product. But different levers need to work together for a business to succeed. That means marketing, pricing, and product development must be treated as core competencies. Bear in mind that a relatively small change in pricing can result in faster results (this is unlike any other area of your business). So do not just set it and forget it. Instead, think of pricing as an experiment. Constantly test and evaluate your pricing strategy to see what performs well. The insights will help you understand what your customers want and what they are willing to pay. You can optimize pricing by knowing the mix of product features and prices that appeal to your customers.
"Experiment. Don't be afraid to try new price points. You'll learn how the conversion rates change and get a feel for the price elasticity of your product." — Wade Foster, CEO/Co-founder, Zapier
According to Price Intelligently, continually optimizing your pricing strategy can lead to an upward shift in your growth strategy within months.
Image credits: Price Intelligently
Offering too few pricing options
Businesses make the mistake of not providing price points. They don't consider the higher-end buyers who are willing to pay as long as you offer a premium experience. Not having many pricing tiers as it leaves no room for your customers to upgrade.
"Always have an upsell. If you have customers who are spending money for your software, then there is always going to be a percentage of them willing to spend even more in order to have the problem solved more completely or more easily." — Andy Baldacci, Marketing Director, Hubstaff
Read more: How to develop a holistic SaaS pricing strategy
Thinking of revisiting your pricing strategy?
If you are thinking of revisiting your pricing strategy, think of value-based pricing. Value-based pricing provides pricing opportunities to businesses as it is predicated on the perceived value to the customer.
Software makes life significantly easier. And customers are well aware of this fact. A consumer's willingness to pay is crucial in finding your ideal price. We encourage you to find out what's crucial to your customers and build your pricing around value metrics. Zapier's "Tasks" are a great example of a value metric. It's a metric that aligns with customers' needs, grows proportionally to usage, and is easy to comprehend.
With Togai, you can unearth how much the customer actually values what your business offers. We are a robust metering and pricing infrastructure that can help you design a profitable and scalable pricing structure that ensures you don't leave money on the table.
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