The other day I had the pleasure of chatting with Eric Boduch, co-founder and chief evangelist of Pendo, on Pendo’s podcast Product Love. We spoke about some of the finer details of SaaS pricing, packaging, and positioning for almost an hour—and we barely even scratched the surface.
Listen to the full episode below, or read on for a recap of our conversation.
SaaS Pricing is About More Than the Price Level
Most SaaS executives only consider a product’s price level when thinking about pricing.
As it turns out, who you’re charging (which customer segments you’re targeting) and how you’re charging them are much more critical to your success than precisely what you’re charging. By integrating a pricing and packaging process into your business, focusing on value-based pricing, and understanding pricing as a function of positioning and segmentation, your SaaS company can better establish your product’s market value and skyrocket your growth.
SaaS Pricing is a Process
Why do pricing and packaging often get left by the wayside by SaaS executives?
It’s a multifaceted issue. The first problem is that implementing pricing and packaging well is difficult. It requires significant time, money, effort, and research. Most companies don’t have a team or even a point person dedicated to pricing. Less than 50% do, even at the IPO stage of $100 million-plus in revenue.
Pricing affects nearly every aspect of a business at any stage, but there’s often no clear ownership of the pricing process within a company. Every functional leader has a stake in optimized pricing, but no one has the authority to make pricing decisions. CEOs lose attempts to change or modify pricing in a sea of other priorities. Without a dedicated owner and process, you can’t optimize pricing to the extent needed.
At any stage, pricing is important and affects all business areas. The problem I’ve seen is it’s usually not owned explicitly by anyone. That’s unfortunate.
Dan Balcauski
Every SaaS company recognizes Product Management as a critical function. The PM is the walking personification of the product in the company, representing all relevant stakeholders, including the customer. Compared to Product Management, which nearly always has an assigned team in place, pricing and packaging usually don’t. When you fail to put a person or process in place, you minimize the strategy, research, alignment, and potential impact of pricing and packaging. While Product Management and Development have long been established as continually evolving and needing dedicated experts, pricing and packaging have not.
The Three C’s Of SaaS Pricing
One of the fundamental decisions companies need to make around pricing is choosing their pricing orientation. Your pricing orientation is the guiding philosophy behind how a company thinks about the pricing process and its inputs. Most folks refer to the three orientations as the three C’s of pricing.
Cost-based Pricing
In Cost-based pricing, companies guide their pricing decisions around gross margins–you price your product on what you need to make a profit. This orientation is where companies often stay, although it’s not a place you want to be long-term. While cost-based pricing can help you determine a price floor and what price you need to maintain profitability, it doesn’t consider competitors’ pricing or how much customers are willing to pay for your product.
Competition-based Pricing
In competition-based pricing, companies determine their pricing based on their competitors’ pricing. While it’s essential to understand your competitors’ prices, it’s not wise to use this as your only input when setting pricing. Not only does this grant your competitors control over your pricing, but you also have no way of knowing how much research they’ve put into the pricing decisions they’re making. You could be basing your prices on your competitors’ wild guesses.
Customer Value-based Pricing
The final C of pricing orientations is customer value-based pricing (often just shortened to “Value-based Pricing”). This orientation rests on the philosophy that a transaction creates value between buyers and sellers. Therefore, value-based pricing aims to determine how the seller and the customer divide up the value a product delivers. As you can probably guess, implementing value-based pricing is not easy–value is a tricky thing to measure. But that’s also what gives this pricing orientation so much power.
The Value-based Pricing North Star
I like to think of value-based pricing as the North Star. It’s far away and impossible to reach, but it should be a SaaS company’s guiding light. The power in a value-based mindset is why I view value-based pricing as an orientation for Saas companies continually aim for.
I view value-based pricing as the North Star. It’s a destination that’s always on the horizon, never to be reached.
Dan Balcauski
In practice, I don’t see an actual value-based pricing model implemented very often.
Value-based pricing requires a lot of confidence. Not only does it demand a deep understanding of the customer and customer segments, but also wise managerial judgment and organizational cohesiveness.
For it to work, the philosophy of value-based pricing has to permeate the entirety of a company. Significant research and organizational alignment have to happen in a value-based pricing orientation, which impedes organizations from adopting it fully.
SaaS Pricing is a Function of Your Positioning
Segmentation, targeting, and positioning (STP) are the foundations of modern marketing. These strategic activities help you to identify the potential buyer groups in your market, what they want, and how they assign value to the product you’re offering. Once you’ve done the initial assessment, you have to determine which customer segment is ideal for your company. Your positioning refers to how you set a context for your product in the minds of your target customers that helps these customers understand your product’s value.
Pricing is a function of your positioning. You should base your pricing on who you’re targeting and the value you’ve created for that specific group of buyers. Both your price levels and your packaging should be dependent on the research you’ve done on the segment or segments you’re serving.
The Four Components of SaaS Packaging
At Product Tranquility, I focus on pricing and packaging for new B2B SaaS products. While most folks recognize “Pricing” right away, “Packaging” can sometimes be a confusing concept for people. SaaS Packaging includes four distinct components:
- Price metric: the units to which the price is applied (e.g.., charge by seat, by transaction, or by some other unit of measure)
- Price model (aka business model or monetization model): how a customer pays for your product or service (e.g., subscription, pay-as-you-go, auction)
- Offer configurations or bundles: bundles of features you create for different customer segments
- Price fences: how you charge different customers segments different prices for the same product. For example, consider identity-based fences (e.g., getting discounts when showing your student ID), time-based fences (e.g., paying less for matinee movie showings), or volume-based fences (e.g., the list price for ten seats of your product is not the same per-seat price as the list price for 1000 seats of your product)
Good packaging lowers your Customer Acquisition Costs (CAC) by making your go-to-market motion much more efficient for the vendor and the customer. For example, straightforward bundles targeted at a customer segment allow a customer to self-select into a bundle that is right for them. These bundles also aid Sales in describing clearly the value of each bundle without requiring an explanation of every single feature you have in your product.
Well-executed packaging helps you communicate your value proposition and justify your price.
Capture a Portion of the Value you Create
The goal of applying these value-based pricing concepts is to allow your company to capture the value you create for your customers. The more specific you can be about who your customers are and what they want, the better you can price and position your product in a win-win way for you and your customers. It’s vital to remember that who you’re charging and how you’re charging are more critical to your success than precisely what you’re charging.
I’d like to see folks embrace pricing as a process the same way they do new product innovation and development.
Dan Balcauski
Integrate a pricing orientation, process, and owner into your SaaS company. And whatever you do, don’t forget about the packaging.