SaaS companies are all about growth.
They spend a lot of time, energy, and money on acquiring new customers and retaining the existing ones.
However, they often overlook the most powerful way to increase their revenue, which is pricing optimization.
According to Price Intelligently’s “The Anatomy of SaaS Pricing Strategy” report, pricing is an untapped growth lever. Why?
In their study of 512 SaaS companies, Price Intelligently discovered that monetization had the largest impact on the bottom line.
According to them, pricing is 2x as efficient as improving retention and 4x as efficient in improving as acquisition.
This means that you are leaving a lot of money on the table if you are not continuously optimizing your pricing.
I’ll walk you through easy ways you can evaluate your pricing and structure it so that your business achieves optimal growth, including:
- Identify your value metric
- Use anchoring in your pricing tiers
- Avoid pricing too low (or too high!)
- Find the right balance of customer surplus
- Leverage billing platforms to optimize pricing models
Identify your value metric
It’s extremely important to identify the value metric that works best for your business. What is a value metric?
It’s what you are charging for. So, for example, for an ice cream shop, the value metric is scoops of ice cream. You pay, say, $1 for one scoop, $1.50 for two scoops, $2 for three scoops. It works because the value of your offer depends on the amount of ice cream the customer gets.
Of course, when it comes to SaaS, things aren’t as simple, and it can take a while until you figure out what your value metric is.
However, identifying your value metric and choosing the right subscription billing model is absolutely crucial for your business success.
For example, Groove increased their revenue by 25% when they identified their value metric and changed their pricing accordingly.
At first, they wanted to be disruptive with innovative pricing, so they went with the freemium pay-per-seat model with the option to have part-time agents.
However, while this seemed like a great idea to the Groove team, the potential customers were unimpressed — the conversion rate of their pricing page was 1.11%.
So, after talking to their customers, Groove switched to the pay-as-you-go model and started charging based on the number of tickets.
But that change didn’t lead to much improvement — the conversion rate of the new pricing page was 1.17%.
Finally, they decided to go with a straightforward pay-per-seat model, and it worked. Their conversion rate went up by 350% to 4.15%, which led to a 25% increase in revenue.
Finally, Groove found the pricing model that worked for them, and as a result, they started to generate a lot more revenue.
What was the Groove team’s main takeaway from this experience?
They learned that no pricing model works for everyone.
Their advice is to consider what your customers expect from your product and make sure that your pricing reflects that.
In other words, you need to identify your value metric and figure out which billing model works best for your business.
And don’t try to reinvent the wheel. Look at your competitors. What is their value metric? Chances are that you should use the same approach to pricing.
Sure, there are situations where being unorthodox about pricing can give you a competitive advantage (for example, Basecamp charges a flat fee of $99/month, while their competitors charge per seat), but they are rare.
Remember, customers don’t care about how innovative your pricing is. They care about getting the best deal — so don’t confuse them (and risk driving them away) with weird pricing.
Offer several plans at different price points
Anchoring is a cognitive bias where the individual unconsciously relies on their initial information when making a decision.
For example, before starting his current company ConvertKit, Nathan Barry made six figures from selling eBooks. He did this by recognizing the prevalence of this anchoring cognitive bias and structuring his pricing accordingly — which ultimately allowed him to make more money by creating several pricing tiers.
Initially, he wanted to sell his “App Design Handbook” for $39, which seemed like a solid price point.
However, he then decided to add two more price points, $79 and $169.
In his article “An eBook pricing model that resulted in $100,000 in sales” he explains that adding these two additional pricing tiers made $39 seem inexpensive, despite it being a high price point for an ebook.
Moreover, according to Nathan, people will always compare any given price point to something else, which is why you want to control what that comparison is made against.
Having several price points makes the potential customer compare versions of your product instead of comparing your product to a competitor’s product.
Same applies to SaaS pricing. Having several pricing tiers not only offers more flexibility to the customer but also allows you to influence the customer’s perception of the price via the anchoring bias.
Make sure that you charge enough
In his marketing email “The Black Arts of SaaS Pricing,” Patrick Mckenzie noted that technical founders often don’t charge based on value.
According to him, they tend to price their products based on the production cost as opposed to the value it provides.
“Unfortunately, technical founders perceive code as being worth its cost, and its cost to them is zero,” observes Patrick.
Of course, that is incorrect even if you wanted to price based on production costs because the technical founder either had to invest their own time in developing the product or had to hire someone to develop it for them.
Moreover, as Patrick explains in his email, it’s pretty much impossible to build a meaningful business with low prices unless you can achieve massive distribution — which most businesses are unable to do.
He then explains that it’s important to charge based on value and that businesses don’t care much about what to them is a minor price change.
For example, when Paras Chopra launched Visual Website Optimizer, or VWO, he was considering offering three pricing tiers along the $9 / $19 / $49 lines.
However, when he reached out to Patrick for advice, Patrick convinced him that marketers that are savvy enough to use A/B testing probably have money to spend on VWO, and Paras went with $49/$129/$249 pricing plus custom Enterprise pricing.
Patrick explains that this pricing was radically better for the business because now a single customer could give VWO $3000 a year without requiring any support.
VWO would have needed 28 customers at $9/month to get the same amount of money.
He illustrates the “price based on value” concept by sharing how he priced his Appointment Reminder software.
He calculated the cost of missed appointments across various businesses and then picked a price point that reflected that.
For example, hair salons typically lose $30 to $60, cleaning services around $80, repair services around $200, etc.
That made it very easy to demonstrate to his potential customers that Appointment Reminder software was worth the price.
So, look at the software that you are selling. What is the value that you are providing to the customer?
You are either helping them save money or you are helping them to make money. So how much money would they lose if they weren’t using your software?
Sure, you also have to take your competition into account, but chances are you could increase your prices quite a bit without a customer revolt.
And remember, if you are selling software to established businesses, they have money to spend — and they won’t mind spending it if you provide a solution to a problem that they have.
Warning: Pricing too low can hurt your business!
I’ll let you in on a little secret — if you are selling to B2B customers, they fret much less about your pricing then you likely think they do. (As long as it’s within the boundaries of reason, of course!)
Moreover, pricing too low can actually hurt your business if you are selling to businesses. Why?
Well, if you charge $9/month and all your competitors charge $99/month, then the decision-makers who are evaluating their options will simply take it as a sign that your product is inferior. Why else would you price it that low?
And the last thing a decision-maker wants is to make a mistake that reflects poorly on them and their judgment regarding product selection
Remember, you are not dealing in a penny-pinching game. You are selling to serious businesses, and thereby professionals, who want the best software on the market and are willing to pay for it.
And sure, there are rare cases where underpricing your product can give you a competitive advantage. Basecamp is the best example of this. They provide an incredible product that can replace a host of other project management solutions — and they only charge $99/month for it.
Check out this screenshot from their pricing page:
It’s pretty hard to argue with “Save hundreds today, thousands as you grow”, isn’t it? But, Basecamp is a brand that is respected, established and admired in the startup community — and one that has been associated with underpricing since day one.
Meanwhile, if you are still trying to make a name for yourself, you can’t afford to compete on price.
When it comes to low prices, it’s not only difficult to make the math work, but it also signals to your prospective clients that there is something wrong with your product.
And no decision-maker will take a risk on an unknown product if they have a reason to believe that the competing solutions are significantly better.
Save yourself from the lose-lose battle of pricing wars and focus on pricing for the value you provide instead.
Create goodwill with consumer surplus
Nathan Barry, the previously mentioned founder of ConverKit, recently shared interesting observations about pricing, consumer surplus and goodwill.
Consumer surplus is the difference between the value you receive from a product and the price the company charges for it.
Too much consumer surplus means that you are missing out on potential revenue.
For example, Nathan shared that ConvertKit team gets so much value out of Basecamp that he’d continue using their software even if Basecamp increased their price by 10x to $1000 per month.
Meanwhile, too little consumer surplus means that your customers probably resent you.
For example, Nathan said that Segment provides an incredible amount of value to the ConvertKit team, but that value is matched by a high price, so there is no consumer surplus.
In fact, whenever a gap opens between the value they provide and the price they charge, Segment immediately closes it by raising their price. This leads to crazy price increases.
As a result, Segment maximizes their revenue, but their customers end up resenting them.
This is why consumer surplus is something that you need to carefully consider when you are trying to optimize your pricing.
Nathan says that, while you certainly don’t want to leave too much money on the table, you need to make sure that there’s a healthy amount of consumer surplus.
Billing platforms can help optimize your pricing
Now, let’s keep it real, optimizing your pricing is not an easy task.
You have to identify your value metric, pick the right subscription billing model, make sure that you charge enough…
You could try to build one yourself, but that would eat up your development resources and distract your developers from what matters the most: your product.
Plus, an in-house billing software will never be as good as a ready-made solution — simply because it isn’t your main focus.
So why bother trying to build something on your own when you could use a powerful subscription billing solution?
For example, Chargify allows customers to experiment with pricing as much as they want. This continuous pricing optimization helps maximize growth.
Want to grow your business as fast as possible?
Well, as Price Intelligently observed, pricing is the untapped growth lever, and optimizing it can help you get ahead of the competition.
So make sure you give it the attention it deserves. Research. Experiment. Optimize. And above all else, find what works best for your business.
Want to learn more about how your business can drive growth with pricing mastery? Download our free eBook, “Master B2B SaaS Pricing: Five Advanced Strategies for Subscription Models,” that gives you actionable strategies for optimizing your SaaS pricing structure.