by Abigail Endsley
SaaS companies spend billions of dollars on marketing and sales every year in order to meet their aggressive—and ever increasing—growth goals. But with this intense focus on leads, pipeline, conversions, win rates, and everything in between, many neglect their most effective growth lever: pricing.
Pricing is especially important for companies adopting a product-led growth strategy. When you’re relying on your product to sell itself, it’s crucial for users to connect the value they’re receiving to the amount they are paying. That’s where value-based pricing comes in.
The marriage of value and price
We live in an omnichannel world of communication. 20 years ago, the sales cycle consisted of 2 parties—the customer and the seller. Now, it consists of the whole world. The customer is more informed than ever. No longer can you simply present a pricing package and expect customers to take it at face value. Your prospects and customers will check out your competitors, compare you on review sites, and get opinions from connections on social media.
Suddenly you’re being evaluated by thousands, and that brings a harsh reality: if your perceived value doesn’t line up to the price you’re charging , you’ll develop a reputation as a price gouger. That reputation is hard to shake. Millennials, who make up the bulk of the current market, are far more price conscious than generations before. To them, price gouging is toxic, and they vote with their feet, running to the companies with the highest perceived value and fleeing from those who don’t.
Today’s savvy SaaS buyers are simply demonstrating a fundamental economic principle which will always remain true: assuming they have the means, people will pay for value.
How to implement value-based pricing
Knowing that everyone should price based on value is easy, but how do you actually determine what your product or service is worth? Unfortunately, this isn’t so easy—value-based pricing isn’t tied to one specific process or pricing model, it’s entirely unique to your business.
However, you can begin building your unique value-based pricing strategy by answering three big questions:
1. Who is your market?
Your goal as a SaaS leader is to solve the needs of your customers. You already know who they are and why they need your product or service. This same information not only determines how much your solution is worth to your target customer, it also reveals how they want to pay for it.
Start by asking:
- Who is your customer and what are you selling them?
- How does your solution affect their work or life? How much time or hassle does it save them? How does it enable them to make their lives or businesses better? How much is it costing them to not use your product or service?
- What (and how) would your target customer expect to pay for your services? What other products do they currently value, and how much are those products worth to them?
The best example of a company who won through deeply understanding their market is Amazon Web Services. Back in 2006, they made an unprecedented change to their pricing model: switching from the standard “pay for what you deploy” to the radical events-based billing approach, “pay for what you use.” To many, this pricing model seemed like suicide.
Low and behold, no, it wasn’t. This model perfectly aligned with AWS’s target customer—developers, who aren’t keen on paying a cent more than they need for services. As a result, the business grew to a $35B business over the next decade.
2. Who are your competitors?
While we don’t recommend choosing your pricing strategy based solely on what your competitors offer, you should take time to understand them and their pricing strategies. After all, how can you remain competitive without properly identifying who you’re competing against and how you stand out from the crowd?
Start by asking:
- How is your product similar to those also in the market? What sets you apart? What is that worth to your customer?
- Which competitor offers a product most similar to yours (aka who is your #1 competitor)? How are they pricing? Is your price competitive in the space?
- What pricing models do your competitors subscribe to? How entrenched is that model in the market? Is it expected? Is it the best way to serve your customers?
Remember Quibi? This video streaming platform misidentified their #1 competitor as Netflix. In this context, they were priced competitively—$5 a month vs. Netflix’s $14. Quibi lost because Netflix wasn’t actually their competitor.
Quibi was a video streaming platform designed for mobile consumption. It offered short custom content designed to be watched in quick bursts. This is quite different from the long-form, bingeable material Netflix produces. Quibi’s actual competitors were YouTube and Tik Tok. And when you compare the “low price” of $5 a month to the low-low price of “absolutely free,” suddenly Quibi was infinitely more expensive than the market leaders, causing it to fall like a shooting star.
The moral of the story? If you don’t have an accurate understanding of where you fit in the marketplace, you’ll be blind to obvious pricing errors which will tank your business.
3. How can you demonstrate value?
A groundbreaking pricing strategy will mean nothing if your customers don’t understand the value you provide. It’s up to you to show them. Companies employing a product-led growth model use a variety of tactics to educate their customers on product value and encourage adoption, from freemium offers to free trials to simple marketing and messaging. Which tactic is best for your business?
Start by asking:
- What’s standing in the way of your customer understanding the value your product or service provides?
- What are the best tools for educating your particular market on value: do they need to be shown? Maybe they’d rather use your product themselves?
- How can you hybridize your pricing model to better appeal to consumer’s expectations while educating them on the benefits of your strategy?
One company who demonstrates value better than almost any other is Slack. Slack uses a variety of tactics to help teams understand the value their software has to offer, from the clear messaging of their tagline, “where work happens,” to an interactive demonstration right on their home page. But the biggest way they show their value is through their product-led growth motion to deliver a light version of their software entirely for free.
While using this free version, it’s not difficult to imagine the value this powerful product could offer your team. However, most teams will need more than the free version of Slack. Upgrading comes with a host of useful features, but isn’t required to understand the unique value this software offers.
This approach to demonstrating value works perfectly for Slack because they know their market: not businesses, but the people who make them run. This $400M industry titan knows that their customers aren’t interested in sitting through a sales pitch. But they are interested in trying out new solutions to solve their team’s communication issues. Stat.
To win with value-based pricing, stay flexible
In B2B SaaS, nothing stays still for long. The businesses who win are the ones who embrace change. This means maintaining focus on innovation, expanding your audience, and—yes—regularly updating your pricing.
No matter how well you understand your customer and competitors, or how much thought and effort you put into demonstrating value, it’s unlikely you’ll get your value-based pricing strategy exactly right the first time. Even if you did, that still doesn’t mean the strategy that wins today will continue to win tomorrow, or in five years. The world moves too fast for that.
So, when it comes to employing value-based pricing for your business, the most important thing to remember is to stay flexible. The biggest mistake you can make in pricing is falling into the “set it and forget it” mentality. The second biggest is to not even try.
The importance of a flexible GTM strategy
The truth is, the future of SaaS pricing is changing. Both sales-led and product-led companies are experimenting with their GTM strategies to expand into new markets, generate more revenue, and achieve rapid growth.
And you need to be one of them. Grab our guide, How Product-Led Growth is Changing B2B SaaS to get started. This guide will help you understand how SaaS pricing is changing—and what effect this will have on the rest of your business, from team structure to customer reaction to software requirements.