TL;DR
- Begin by comprehensively analyzing your SaaS pricing strategy, ensuring it's not solely based on competition or cost-plus models but is informed by customer willingness to pay.
- Pricing is a dynamic growth lever that should evolve with your company, leveraging data and technology to experiment and optimize.
- Dive deep into customer usage data to understand behavior and preferences, segmenting your users for targeted pricing strategies.
- Directly engage with your product's users and decision-makers to understand the value your SaaS provides and its direct business impact.
- Create a dedicated pricing committee to evaluate, suggest changes, and align pricing strategies with your company's core values and objectives.
- Embrace pricing experiments across different metrics and geographies to find the most effective strategy, using tools for back-dated analysis and optimization.
Are you looking to optimize pricing for your SaaS business? This article lays out a step-by-step process of how you need to go about it.
With the economic downturn staring at us right in the eye, startups are doing everything in their capacity to ensure that they are able to tide over these tough times - just to get more runway time.
Startups are downsizing, firing employees and cutting costs wherever possible.
But are they looking at pricing?
While it may sound like an obvious move, many companies are not looking at pricing as one of the ways to boost revenue. Pricing is often overlooked in the grand scheme of things.
What if you could increase revenues and reduce churn just by making changes to your pricing?
So, where do you start?
Comprehend your current pricing
Here are some questions to guide your understanding:
- How did you arrive at your pricing?
- Is your pricing backed by data?
- Have you experimented with pricing?
Most often than not, the majority of SaaS companies base their pricing based on competition or a cost-plus model. Ron Wood (from Pricing insights), in his CEO Forum interview, opined that the “cost-plus model is one of the biggest mistakes companies can make today.” (Why? In short - it does not take into account the ‘customer’s willingness to pay.’) The same goes for competitive pricing; it may not correlate to the value they are providing.
There are better ways to approach pricing.
Evolve your pricing as your company grows
Pricing is detrimental to the success and failure of your business. Pricing is one of the four growth levers (Product, Placement, and Promotion being the others) that most companies neglect. They do not take proactive steps to iterate and experiment with time.
Frequent price changes are common even in behemoths like Netflix and Spotify. They experiment with different pricing strategies to ensure that money isn’t left on the table to this day.
But you may wonder, why companies are unable to experiment with pricing if it seems so important.
Mostly, it is because:
- Companies do not have enough data available in a structured manner to make pricing decisions
- Companies do not have the technology to experiment with pricing.
- It takes too much of the technology team's bandwidth
Insights from Patrick Cambell of Profitwell and Kyle Poyar of OpenView Partners have ignited sparks within the SaaS community for one to rethink their GTM motion and monetization strategy.
In this piece, we'll take you through how every SaaS company needs to approach pricing.
Also Read: Netflix’s The Playlist tells us why pricing needs to be dynamic
How your SaaS company must go about pricing
1. Understand the usage of your customers
DATA! DATA! DATA! That’s where we start.
Pull up user analytics data. Dive deep into usage data - how each customer uses your product. Understand customer usage - what features are being used, what features are being underutilized, and what features are being over-utilized. If you look deep enough, you can identify the customers going to churn and when.
You will identify trends within users and will also identify that your customers are using your product in a completely different way than you intended.
From a pricing strategy perspective, you would need to understand:
- Monthly Recurring Revenue
- Lifetime Value of Customer
- Number of New Signups
- Customer Acquisition Cost
- Free to Paid conversion
- Time to Value - How long does it take to get to the “Aha” moment.
- Most used feature - What customers are using the most.
- Product usage stickiness
- Net Promoter Score
- Churn Rate
And most importantly, keep an eye on your North Star metric!
Now, it's time to categorize your users. You can do it as follows:
- New users
- Freemium users
- Power users
- Free trial users
- Inactive users
Now analyze, analyze, analyze!
Analytics - would be the starting point for you to understand your customer better and take necessary steps accordingly.
Pro tip: It's a daunting task only the first time around. The process does get better with time.
2. Talk to your customers
“Talk to your customers.
Ok, but who?”
In most B2B SaaS companies, the user of your product and the decision-maker are two different people.
Speak to both of them.
When you speak to the decision maker, ensure you collect the following information:
- Understand the perceived value of your product, i.e., how much they will be willing to pay for your product
- Understand what could affect the “willingness to pay” for your customer (the most used feature of the product)
- How is your product actually impacting their business?
Also, ensure you collect the following information from the users of the product:
- Most used feature (rank based on priority)
- Features that are not helpful
- Features that they wish existed
- Their biggest pain points with the product
- Reasons why they would stop using the product
Do not just go after the high-value customers. Get insights from all types of customers—the ones that have been with you for a long time, the ones that are new, and the ones that are about to churn.
Pro tip: Make them feel important.
3. Form a pricing committee
Form a team consisting of people from sales, marketing, product, finance, customer success, and management. Your pricing committee needs to be aligned with your company’s core objectives and values. The primary purpose of a pricing committee is to evaluate current pricing and observe if there is room to make changes that can positively impact the company. The end goal of the pricing committee is to make pricing more strategic and to align the company around value.
A pricing committee must be empowered to make decisions and execute them. The committee should have a clear charter and authority.
Before you meet with them, put together data that will help your pricing committee with all the necessary information needed, such as:
- Usage Metrics
- Customer feedback
- Competitor research
- Median Sales range
Make the pricing committee in charge of the following:
- Periodically reviewing this data
- Suggesting changes (ensure to document and get into the “Why’s”. The “Whys” are more important than the $ figure change you intend on making)
Pro tip: Just get started. Forget “perfect”
4. Run pricing experiments
Your pricing committee must have the technological ability to run back-dated experiments. Tools like Togai would help you a great deal here. This will be the backbone for anything pricing in your company.
Identify the right value metric based on usage and feedback from your users. Run experiments with pricing changes or introduce a new component to pricing. You could even test your pricing in a particular geography vs. doing a worldwide experiment.
If your GTM motion is sales-led and you want to move to a product-led growth motion—bringing in usage-based pricing is inevitable. Adopting usage-based pricing could increase product adoption, reduce churn and increase your LTV (might even be a game changer).
Run these experiments fearlessly.
Pro tip: Analyze results, build hypotheses, and drive actions
5. Optimize. I repeat, OPTIMIZE
Pricing is not a one-time affair, so do not take your foot off the pedal. Pricing is not a “one-and-done” exercise. It is always a work-in-progress exercise.
Don’t leave money on the table.
As we know it “Change is constant” and a lot of factors around you can increase or decrease demand for you. For instance, When Covid-19 struck, a whole bunch of companies had to shut down on one end of the spectrum and companies that were into Logistics or diagnostics saw a huge surge in their businesses. Similarly, your competition could be shutting down - opening doors to your business.
As some of these external factors drive demand, optimizing your prices to convert the demand is critical.
Each domain is different. Every company is unique. Even a 1% improvement in pricing results in an average increase in profits of 11.1%.
Begin using pricing as a growth lever - Identify the right value metric and start monetizing your Saas business accordingly.
Want us to take a look at your pricing and give you our feedback? Reach out to us at [email protected]
