How much should your Software-as-a-Service business charge for your amazing, revolutionary product? Unlike businesses selling burgers or gardening tools, the answer may not be simple. As the Co-Founder and CEO of Price Intelligently, Patrick Campbell has analyzed SaaS pricing from every angle and found many people are pricing their product completely wrong.
Campbell has worked with hundreds of growing SaaS businesses like Autodesk, New Relic, Wistia, and Litmus, and shared the strategies he uses to help them optimize pricing strategies and stop leaving cash on the table. We spoke with him about value-based pricing, common SaaS pricing mistakes, pricing transparently and the benefits of changing your pricing often.
1. Your company, Price Intelligently, specifically focuses on helping SaaS businesses find the right pricing structure for their product. This is a contentious matter within the SaaS space. Why do you think there’s so much disagreement about what type of pricing works best?
I think it’s less about disagreement and more about the fear of the unknown. We talk to a lot of SaaS companies, from the enterprise all the way down to early-stage startups. There’s a lot of indecision because pricing isn’t something that you are taught in school or even really on the job as a marketer or product person. A lot of people approach it like a black box, and that results in boardroom arguments until someone finally makes a decision. Unfortunately, that lack of decision-making and lack of process really leads to pricing being a contentious issue.
2. What challenges were you trying to solve in the SaaS market when you started this company? What troubles have you personally encountered in terms of SaaS pricing?
On the product side of the business, a lot of times you are putting blood, sweat, and tears into building something cool or solving an enormous problem. We found that even though people put so much effort into the actual production of a product, when the time came for monetization, people were very casual. “Oh, you know. Let’s just put a pricing structure out there and see how it does.” That’s troubling.
What a lot of folks don’t realize is that pricing is the center of your business. Everything that you’re doing from product to support to sales and marketing is used to drive people to that price and justify that price you’re putting on the page. Analytically, McKinsey & Company does pricing studies every few years where they’ve found that pricing has the biggest impact on your bottom line compared to things like volume and even cost optimization. When you start to think about pricing that way, all of a sudden it’s like, “Holy cow! We’re only spending on average six hours solving our pricing scheme. Maybe we should spend a little bit more time.”
It’s one of the most important things, if not THE most important thing in your business and very few people care about or understand it.
3. You’re a big believer in value-based pricing, what does this mean to you exactly? How can companies assess their own product’s value?
To give you a really basic definition, value-based pricing essentially means that you’re pricing based on where your customers value a product. Cost pricing in SaaS and software doesn’t make a ton of sense because your customers don’t care about your costs. Competitive pricing doesn’t make as much sense either because the beauty of SaaS software is that it’s relatively quick and easy to change your product line or add a feature.
More specifically, value based pricing means that you talk to your customers and actually collect data on what you should charge. Should it be per user, should it be a flat fee, should it be per API call? It means actually asking customers questions like, “At what point would this be too expensive?” And then finally, it means making sure that you’re building the right price packaging for that customer. You are collecting data to figure out who you should sell to, what you should be selling and — ultimately — how you much you should be selling it for.
4. What are some of the most common mistakes many SaaS companies make when setting the price for their products?
A lot of people don’t price on what’s called a value metric, which is essentially how you’re charging and what you are charging for. It’s so important to identify because you want to make sure that once you have that customer through the door, you’re able to take advantage of expansionary SaaS revenue. A lot of companies will sell something for a flat fee to a very large Fortune 500 company and to a small, 10-person startup. That’s obviously a huge problem, because if you price correctly, that Fortune 500 company is going to pay much more.
Another big mistake is not talking to customers about pricing. Many people think that pricing is this really big secret between them and their customers — like it’s not polite talk to people about religion or politics or money. It just doesn’t make a lot of sense because people know they’re paying for the product. If you’re scared to talk to them about it, then there might be some bigger issues with your packaging and your actual product offering as a whole.
The other big mistake is really aggressive discounting strategies. With SaaS, obviously they’re paying you on recurring basis whether it’s yearly or monthly. Discounting just doesn’t make sense in a lot of cases. We found that the lifetime value for the discounted customer is typically about 35 – 40% less — which is expensive.
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5. Why do you believe so many companies stick with a 3-tiered or 4-tiered approach? Does this type of pricing work well?
The basic strategy is you have a price for the low end, something in the middle, and then one or two tiers on the high end. The reason this is so prevalent is because people use a path of least resistance to set up their pricing. They might be an early stage company, they’re about to launch a new product and they suddenly realize they need a pricing page. They just look around at what everyone else has done and copy it. I think that’s kind of what’s led to a lot of the prevalence.
Unfortunately, that the path of least resistance doesn’t make a ton of sense. You might have a customer subset that really should have a fifth tier or really should all go into one tier. It’s more important to price based on your customer personas than it is to have just four tiers or three tiers. If you have, for example, three different types of customers, that makes sense to have a three-tier approach.
6. How should you use data analysis and customer surveys to help set prices?
The most important concept here is that you should be talking to customers. Talking to 10 people is better than talking to no people. Anyone can do this with SurveyMonkey or another survey platform. There are a couple of methodologies and algorithms that have been developed to help you figure out which features go into which pricing tiers. Rather than asking customers, “Hey, do you want all of these features?” You ask them, “Out of this set of four and five features, what is the most important and what is the least important?” You force your customer respondent to make a decision between different features.
On the pricing side, ask customers about pricing ranges. People don’t think about pricing as a single point — they think about pricing on a spectrum. So instead of asking, “How much would you be willing to pay for this product?” You ask, “What point is this way too expensive? At what point is it a good deal? At what point is it too cheap?” It sounds complicated, but even with 30 or 40 answers from potential customers or current customers, you can determine whether you have a $100 product, a $1,000 product, or a $10 product. Then you start to slowly get a pricing page that is data-backed rather than guess-backed.
7. How should pricing vary for a seed-level startup, an expansion stage company and a more established SaaS company? How does pricing affect the growth rate of these different stage businesses?
At every stage, there are different strategic goals. When you’re in the early growth stages, we typically recommend for a company to update their prices every three to six months. You are really optimizing for getting the product out there, figuring out unit economics in your conversion funnel and making sure people are willing to pay. Your products should be changing rapidly and improving, so you price should as well. We always ask people, “Well, has your product improved?” “Yes.” “Well, why hasn’t your pricing improved?” They’re all connected.
When you get into the expansion stage — after you’ve found product-market fit — typically we recommend a more adaptive strategy. If you do the customer survey methodology, you may find your range is between $50 and $70. You should price closer to the $50 than the $70 because you can really compound your growth through more distribution. That strategy allows you to get distribution to a higher level. If your retention metrics are decent, it means that later down the road you can focus on revenue growth.
When you’re a little bit more established, that’s when you start optimizing and raising your prices. So in that $50 to $70 range, you start to move towards $70. You start having add-ons and you start offering professional services. You can get a lot more into expansion revenue once you’re an established company because you have retention and distribution figured out. Now you can just start riding the revenue train.
8. How should a SaaS company handle a pricing change correctly? How do you keep existing customers from being upset by the change?
Any change you make is going to invite some level of churn. The question is, will that be a large amount of churn or a small amount of churn? Even if you are lowering the price, you’re still reminding people that they’re paying you money. We’ve actually seen people say, “Oh, wait a minute. I don’t want this product anymore. Let me cancel my account.” There is going to be some churn as you change your prices unless you fully grandfather people in.
It’s about leveraging the process to get the best results in terms of your strategic goals. You can reward early adopters and fully grandfather pricing, which is a common practice. Then there’s a grandfather discount, which means someone gets the old pricing plan for a year and then after that they get the new pricing. Then there is just announcing, “Hey, we’re changing our prices.”
Make sure any price change is customer-focused and you’re weighing the cost-benefits of how you’re changing your prices. It doesn’t have to be a change in the actual numbers you’re charging. You can spur upgrades or diminish downgrades very easily by changing the value metric or the different features that are within your tiers instead. If you’re interesting in diving into pricing more, here’s an article that outlines strategies for changing SaaS prices.
9. Why do you think there’s such a taboo around talking about pricing? Should companies be more transparent about the price they charge?
Typically, when I see someone who does not have any indication of price on their website, my immediate reaction is they don’t understand the customer. When a customer comes to a particular place in the purchase funnel, they don’t necessarily want to get on the phone or and talk to someone for half an hour just to figure out, “Is this a $10,000 product? Is it $100? Is it $100,000?” They want some benchmark of the price. I don’t want a salesperson talking to a lead that comes in with the expectation that it’s a $50 product. There’s no salesperson in the world that can sell to that lead and realign those expectations to pay $50,000.
You should always opt for some level of transparency. It doesn’t mean that you have to put the actual price, but you can definitely still say, “Packages start at $1,000 up and our enterprise packages start at $30,000. Contact us to learn more.” You don’t want to waste anyone’s time.
Patrick Campbell is the Co-Founder and CEO of Price Intelligently, the team and software behind some of the biggest SaaS pricing strategies out there. PI is also the makers of ProfitWell, which offers free SaaS metrics for Stripe. Prior to Price Intelligently, Patrick lead Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the NSA.
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