“The single most important decision in evaluating a business is pricing power,” said Warren Buffet when describing his evaluation methods prior to getting involved with companies.
While pricing has always been a critical element of a SaaS company’s success, pricing strategies that worked in the past are no longer enough to keep you ahead of the competition. At Chargify, we’re seeing more SaaS companies rethinking how product packaging, billing models, and pricing can be optimized to fuel growth in 2018.
With the recent release of Chargify Elastic Billing™, we’re very excited about where SaaS pricing is headed so we reached out to pricing experts and innovative SaaS companies that regularly experiment with pricing and asked:
“What is the #1 piece of advice you’d share for how SaaS businesses should think about pricing in 2018?”
As the answers came in some common themes emerged:
- Give pricing the attention it deserves. Smart SaaS companies need to give pricing its own position within the company: a specific person in charge and accountable for packaging and pricing. Or at the very least, companies need to dedicate more time and resources to their pricing strategy. Research by Price Intelligently found, on average, companies only spend 15 hours in the history of their business focusing on pricing.
- Identify the right value metric and build your prices around it. “A value metric is what customers will pay for and how you are going to charge them,” explains Hiten Shah. The value metric for each SaaS company is different, but utilizing the right value metric in pricing is key to growth.
- Regularly experiment with different offerings. Your pricing should never have been considered written in stone, but in today’s competitive landscape, savvy SaaS companies are testing pricing, packaging, and promotions on an ongoing basis. Industry leader Amazon Web Services (AWS) constantly evolves their pricing with different monetization models for niche customer segments; 62 price changes as of July 2017. While your offer experiments may not be as constant as AWS, every SaaS company should be testing different offerings to optimize monetization.
Before we jump into letting the experts speak for themselves, we do want to take a moment to express a heartfelt “thank you!” to everyone who contributed to this post.
In 2018, doing pricing research is more important than ever. Software has become easier than ever to build. The pace at which new products and solutions are being created is only increasing. Now, there’s more competition than ever before.
When customers have countless choices available to them in the market, they are prone to shop around for the best price. They do more research before making a decision to purchase a product, and if the products all appear to have similar features and the reviews make them seem about equal, they’ll often just buy the cheapest one they can find.
Sounds like a race to the bottom. It’s not. If you have a core understanding of what the needs are in your market and what people are willing to pay for, you’ll differentiate. You’ll be able to compete without having to be the cheapest solution in the market.
Senior Director of Market Strategy
OpenView Venture Partners
“Make 2018 the year that you finally put someone in charge of your packaging and pricing – and hold them accountable for it. In a survey of 1,000+ SaaS companies, we found that more than half have nobody focused on pricing, even as just a small part of someone’s job description. Those companies are substantially less likely to test their pricing and in turn, are leaving too much money on the table. You’ll rarely regret making someone responsible for pricing. In fact, there’s a solid chance that person becomes your highest ROI employee.”
Co-Founder & CEO
“Value metric, value metric, value metric.
Identifying and pricing along your proper value metric is the difference between surviving and thriving.
Only 4 out of 10 companies are using this absolutely crucial piece of their pricing strategy, and data shows those companies using a value metric are growing at nearly double the rate as those who are strictly pricing based on features.
Picking the right value metric you’re charging for is critical: the ideal value metric should align with your customers’ needs, be easy to understand, and grow with your customer. To be successful in 2018, SaaS companies need to correctly utilize the value metric.”
“In 2018, we continue to see the trend of more and more SaaS businesses straddling the line of different monetization models geared towards different customer segments. For example, many businesses offer a one-size-fits-all pricing strategy with transparent pricing for every customer, independent of segment or ability to pay. Other businesses create custom packages and pricing for every offer, tailored to that particular customer’s needs. But increasingly, these businesses are simultaneously living in both parts of the spectrum, with one-size-fits-all models for certain customer segments (e.g., SMB and middle market) paired with custom pricing models for complex customers (e.g., enterprise offerings).
In the growing Relationship Economy, SaaS businesses will need to focus on their ability to package, price, and promote different offers to different customer segments based on what features they will need, how they will consume products, and their ability and willingness to pay. It’s time to start treating each prospect and customer as a unique relationship that will continue to evolve and change over time. “
“Traditionally, the way to expand an account was to charge per seat (à la Salesforce). However, the per-seat model doesn’t make sense for every product. Be it number of contacts, page views, or gigabytes stored, there is a value metric every SaaS can expand on. Make 2018 the year you nail it so you’re on your way to negative churn.”
Co-Founder & Managing Partner
Software Pricing Partners
“With so much capital chasing so few deals, it’s never been more important for software companies to be laser-focused on valuation. And no single lever you can pull has a greater impact on value than your monetization strategy. This is particularly the case for SaaS businesses.
Investors will fight over each other to be a part of a great growth story, but they are increasingly demanding a thoughtful revenue model that SCALES – one that provokes faster sales, solid margins, low customer acquisition costs and high retention rates. Either they’re investing heavily in companies that have that figured out, or they’re jumping on opportunities to capture the upside for themselves by forcing monetization improvements post-investment.
This impact on valuation is why — whether you are in early-stage growth phase, pre-IPO, or enterprise expansion mode – today’s environment dictates that you address monetization sooner rather than later.”
“Where is SaaS pricing headed? Transparent, use case and usage-based (but chunky) models. Transparent so customers can understand and predict, use case-based so that it aligns with value for customers and allows for upsell paths for sales, and usage-based but chunky (not granular) so that SaaS companies manage volatility while still providing customers with the ability to buy what they need. SaaS companies that continue to deliver value to customers over time will thrive with this approach to packaging and pricing.”
“Continuously test and fine-tune new ways to better setup your pricing, with improved value messaging at every touchpoint.
It is common for leaders to conclude or suspect that pricing is the cause for low (or decreasing) conversions, wins or renewals. They may even reference verbatims from prospects, customers or sales staff as proof that pricing is too high or that a discount is necessary.
Reminder: It’s not the price they don’t like, but what they understand they are (or are not) getting for that price.
One of the best (most effective) ways to understand, demonstrate and communicate value … is to contrast life WITH -vs- WITHOUT your solution.
The single most important and productive investment of your time is to get the right people in the same room and on the same page regarding how you make a meaningful and measurable difference in the lives of your customers.
Simply start with two columns on a whiteboard; (a) Life Without – Status Quo and (b) Life With – Your Solution. Be honest and realistic with how you actually help them save money, make money, save time, increase quality, avoid risk, achieve compliance, etc. (Helpful Tip: use and map to Bain’s “The 30 Elements of Value” or Christensen’s “Jobs To Be Done”).
Your pricing determines both your revenue and your profits. Get paid what you are worth.
Ultimately, you are worth the prices you accept.” Read Chris’ full response to our question here.
“Pricing for SaaS gives product and marketing managers incredible opportunities to design unique models. At ProductPlan and at previous companies we developed a pricing model that creates differentiation in the market. I encourage companies to think about pricing as a part of the product offering, especially when it ties back to the value your product provides.
For example, at ProductPlan we build product roadmap software. Our customers use our solution to plan, prioritize, and communicate their roadmap. It’s in their best interest to share the roadmap widely within the organization. For that reason, we decided to give away free product licenses to viewers of the roadmap. Companies pay for licenses to edit the roadmap, but viewing and commenting is free and unlimited. It’s easy to understand and fits nicely with how we think roadmaps should be communicated.
In 2018, product managers should thoroughly understand the value of their SaaS product, and use their understanding to develop unique pricing models, delight customers, provide competitive differentiation and ultimately launch a more profitable product.”
Being successful with SaaS pricing in 2018 includes all of the above and can’t happen without an underlying recurring billing engine that allows your SaaS the flexibility and agility to quickly launch, change, and test a variety of offerings without breaking anything internally or causing a billing bottleneck.