11 Crucial Tactics for SaaS Pricing
Over the past few weeks the subject of pricing has come up at two businesses I am advising. Both are building enterprise focused Software as a Service (SaaS) businesses, though in very different sectors. Getting SaaS pricing right is not easy.
1. Price on value, not costs
Be completely focused on the value you deliver to your customers. Yes, you should clearly have a good understanding of the costs to deliver your service to build a scalable profitable business, but your pricing must be based on value. You need to understand your customer’s business, the margins they deliver and the internal and external challenges they face. If you are planning to operate across different verticals, those margins and factors will change.
2. Ensure that your pricing can be justified on Return on Investment (ROI)
In my experience it’s rare that a SaaS business can demonstrate direct sales attribution. By that I mean that a single user action on your software can be tracked all the way to an individual sale in your enterprise customer’s business. If you have the data to demonstrate that, then you have your revenue elevator and you should be looking at attribution revenue models such as cost per customer acquired (CPA). For those businesses where you cannot demonstrate direct sales attribution, and I suspect that is the majority of SaaS businesses, you need to demonstrate a robust ROI. In the very early days your customers will challenge your pricing. You will be on much more solid ground if you can say that “we deliver you an increase of revenue of x”, or “we deliver a cost savings of y” and “we charge a proportion of that increase or savings on a monthly basis”. Using a ROI of 3x has worked well for me in the past.
3. Use analytics to justify that ROI
You need to be measuring the hell out of your solution, to continually reinforce the benefits to your customers. This will likely require tracking and tagging of their sites. Think of it on a tiered basis. Tier 1 analytics should show the revenue or cost savings you are delivering. Tier 2 analytics should provide “engagement metrics” that support the revenue increases or costs savings, such as increased time on site, increased page views. In the early days you can do this with spreadsheets, but as your businesses starts to scale, then look at building analytics dashboards for your customers.
4. Benchmark your pricing against competitors or comparable solutions in different verticals and understand the cost of “do it yourself”.
This will give you confidence that you are in the right ballpark. Keep them in your “back pocket” for when you also need to give your customers the confidence that they are paying the right price for a brand new service.
5. Help your customer build a business case to use internally
In the early days it is likely that you will be selling to an individual within the enterprise (they may become your champion in a more complex sale). As well as being excited about what you offer, they will also have to justify their decisions internally. Help them to do this by building a business case with them that clearly justifies your pricing. If it’s a totally new product or solution, they will have little feel for “what is the correct price” and will rightly be concerned about looking a fool for over paying. They wont have done the level of analysis that you will have done, so you have to help them.
6. Provide a clear route for upselling and cross-selling
In your enthusiasm, do not give all your products and features away with a single price. You need to breakdown your products into a long list of benefits and features. Use these to then create tiered pricing, which scale with both volume (eg seats or users) and features. You need both volume and features to scale across your pricing table to make any negotiation two-dimensional – your sales team, which at the start will be you, will thank you for that. Take a look and learn from the likes of Hubspot or Salesforce.
7. Do the sensitivity analyses and model it out for customers of different sizes.
These models don’t need to be over complex, “back of the envelope” is fine. But, you do need to understand how your pricing scales with different size of customers and what factors it is most sensitive too. This will help you refine your pricing and help during negotiation. (Not least to prevent large enterprises seeking to use your lower tiered pricing.)
8. If you offer a trial, make it clear that you are discounting from the full price.
Trials seem to be becoming endemic. There are pros and cons for doing so. On the pros side, it gets your customer to see the benefits of your product or service quickly. You need to set clear expectations for the duration of any trial; agree what you will both measure to demonstrate the benefits; and ideally have an auto-conversion clause in your contract to move onto your standard pricing at the end of the trial (clearly the customer also needs to have the right to cancel at the end of the trial). Having that auto-conversion clause will also force you to not fudge or short cut the sale, ensuring you socialise and justify your pricing before you start the trial. Whether you charge or not for the trial is again open for debate and clearly the freemium model has lots of proponents. My view is that the freemium is probably better suited to the SME or SOHO market. For large enterprises, you should charge a nominal amount so that they have skin in the game, to ensure your solution is implemented properly and on time.
9. Walk though your pricing with a couple of “friendly customers”
You will undoubtedly have built a network of trusted “customers” as you have been refining your product or solution for market fit. Run your pricing model by those customers to get their input. When you consider their feedback, just be aware they will provide it with the notion that they may eventually be paying that price!
10. Do not price too low in the very early days
It goes without saying that is much easier to drop your price, but much harder to put it up! In the early days, until you really understand your pricing and in particular what large corporates are prepared to pay, I am not convinced you need to publish a pricing table. The risk is that you end up pricing too low.
11. Be prepared to change your pricing
You will likely end up adjusting your pricing a number of times in the early days. Start reviewing it as soon as you start to get data through from those early customers.