There are many factors to consider when pricing your SaaS product: What are your competitors charging? What characteristics are you charging for (e.g. storage, users, etc)? Do you target different market segments or personas that should be priced differently? What is your customer’s lifetime value and how much can you afford to charge new businesses?
All of these factors play a role in the product pricing discussion. However, there is one metric that gives you insight into what your product is worth: the value metric. And it is this metric, more than any other, that should impact, inform and evolve your pricing over time.
What is a Value Metric?
Essentially, your value metric is the foundation on which your pricing model is built. It is what and how you are pricing.
Your value metric should determine how your product pricing is configured and how your tiers are structured. Another way to look at it is this: What does your customer want and what do they think is fair to pay for it?
For physical items – say, computers – one unit is sold at one up-front price. The value metric for the computer is each individual unit. Alternatively, if you were selling a help desk software, the software may be sold per month per number of users. The value metric for this scenario is the number of users.
In both of these cases, the value metric makes sense – you wouldn’t pay for a computer based on how many people might use it over time. (Not to mention, that would be nearly impossible to track.) Instead, you pay one up-front cost at the time of purchase.
The SaaS scenario is different. Customers may have several different members of the support team who access the software, thus establishing the value as the number of users who benefit from the service each day.
Benefits of Using a Value Metric
The number one benefit of using a value metric to inform pricing is that you know your target customer will be willing to pay for it. After all, you’re pricing based on the value they perceive from your product.
Another benefit of using the value metric is that it’s a useful forcing function to make you think about how you are offering your SaaS product. As basic as this sounds, many companies default to a per-month and per-user setup. However, this might not be the most effective way to price your product, and you shouldn’t choose a pricing model because of its convenience.
Alternatively, the value metric forces you to think about what your customer actually values in your product. Not only does this insight help inform your pricing strategy – but it also helps you prioritize which features and functionalities to enhance and evolve in order to add increasing value for your customer base.
But how do you find your product’s value metric? Guessing your value metric and knowing your value metric are two different things – you must take steps to gather actual customer feedback that informs an actionable value metric for your product.
Value Metric: Make Sure You and Your Customer are on the Same Page
Understanding your value metric starts with understanding your customer. What do they value about your product? How do they use your product in their daily business operations? What pain points does your product solve for them, and where do they save the most time?
Keep in mind that your best value metric isn’t always the most obvious one. Customers are the power-users of your product. They likely use it every day, and they have an in-depth understanding of its functionality as well as individual sentiments about its ability to solve their unique business challenges.
To truly understand your best value metric, you must not only talk to a large subset of your customers firsthand, but you must also look at the insights you collect with a customer-focused lens rather than a business lens.
Functional vs Outcome-Based
To pick the best value metric does rely a lot on putting yourself in the customer’s shoes. But it also helps to know the different types of value metrics.
Group value metrics into two types: functional and outcome-based. Functional value metrics are metrics that are formed around a function the product performs, such as per user or per message.
Outcome-based value metrics are based on (as you might expect) an outcome for the customer. Outcome-based value metrics could be something like how many times they can download/export a report or asset, or the amount of income your customer has generated through your service.
Functional value metrics are popular with SaaS companies – especially the per-user metric. But there is a lot to be said for using outcome-based value metrics.
One of the main draws to an outcome-based value metric is that it reduces churn. After all, why would customers churn when they only pay based on their successes in your product? If they are not doing well, then they aren’t paying. If they’re finding success with your product, why would they leave?
Cloud hosting is a great example of this. You only pay for the bandwidth you use, but you only use bandwidth if people are visiting your site. This is the type of result-oriented relationship that defines the outcome-based value metric.
Check out these results from a survey done by ProfitWell.
According to Patrick Campbell of ProfitWell, “When we look at the gross churn of companies using different models you’ll note that both types of value metrics outperform feature differentiation with up to 75% less churn, but the outcome-based value metrics take this a step further with an additional 40% reduction in churn.”While value metrics are successful at reducing churn as a whole, choosing a outcome-based value metric may cut down on churn even more. Click To Tweet
Finding the Best Value Metric for Your SaaS Product
Value metrics can be pulled from in-depth research and testing, meaning you have to get out there and figure out how your customers feel about your product.
It’s easy to be influenced by the backend processes and sales goals. You have a bottom line to meet and a company to grow. However, your customers don’t care about those details. They are concerned with getting value out of the product they’re paying you for. So making sure you have a good handle on your value metric is indispensable in the pricing process.
So how do you find the ideal value metric for your SaaS product?
Make Sure it Matches Customer Needs
We’ve discussed this already, but it bears repeating: Make sure your value metric lines up with what your customer needs. It’s important to assess what your customers are getting out of your SaaS product before settling on how to price it.
Make Sure it Scales Appropriately
Let’s say you have a product that gives customers the ability to create and host a membership framework. You create three different tiers: a basic, medium and elite tier. Each has its own set of features, which are used as the incentive to bump up to the next tier.
However, the number of members each framework supports is unlimited. So what’s to keep website one who has 100 members and website two who has 100000 members from paying the same price?
Nothing. It doesn’t scale. But if you chose a value metric of number of members, then the pricing is scalable. Let’s say you change the price to every thousand members, the price bumps. So now, instead of website one and two paying the same price, website two pays 100x as much as little website one. Why? Because they have more members and are using more of your resources.
Make Sure it Grows with the Customer
As your customers scale and your company grows, will your value metric change? The correct answer here is, “Yes!”
Just like everything else in pricing, your value metric is never static. You must constantly evaluate its relevance and adjust accordingly if and when you see customers’ perceived value begin to shift.
This is an imperative detail if you want your value metric to stay relevant and performant over time. Otherwise, you could lose out on a ton of revenue.
Make Sure it’s Easy to Understand
If prospective customers can’t understand your pricing model, then you don’t have a good value metric. Plain and simple. If they don’t understand your value metric, they won’t understand how they are paying. And if they don’t understand how they are paying, they will likely go off in search of an alternative with clearer pricing.
Value Metric is Just Half the Battle
Figuring out your value metric is just part of the battle. Pricing your product is a complicated and ever-evolving task – even if pricing looks simple from the customers’ perspective. (Which it should.)
You have to figure out what potential customers are willing to pay, what pricing models will keep you profitable, when you should consider changing pricing, and so much more. But, using a value metric as your north star will make all of your pricing activities that much easier. And, it helps if you have a billing and revenue management platform that allows you to easily set price points and experiment with different pricing schemes as you work to find the pricing model that best fits your business.
Check out our other pricing articles on the Chargify blog or, better yet, talk to one of our B2B experts today!