I joined Brett McGrath, Vice President of Marketing at The Juice, on the Modern Day Marketer podcast to chat about how SaaS pricing and packaging correlate with business success and why it’s vital to understand the value you provide customers.
- Fundamental approaches to understanding customer value
- Four essential elements of packaging
- Evolving pricing efforts with company growth
You can listen to the full episode below. Or, read on for a recap of our discussion.
How Should SaaS Leaders Look at Value?
There are multiple lenses you can use to understand value. The primary ones that I use are Jobs-to-Be-Done (JTBD) and the value cascade.
In his book, What Customers Want, Anthony Ulwick names three core value drivers that determine the value a customer will derive from a product.
- Functional drivers refer to providing functional or economic value to the customers by enabling them to carry out a function with lower cost or better performance.
- Emotional drivers refer to changing how a customer feels. For example, if your product helps build confidence or increase peace of mind.
- Social drivers bring value to the world at large. Imagine non-profits or government institutions fighting against climate change or for equal rights.
The value cascade, a term coined by Thomas Nagel, has four parts: Use Value, Exchange Value, Perceived Value, and Willingness To Pay.
Use Value refers to the utility of your product, while Exchange Value refers to your product’s value relative to other players in the market. It’s part of the pricing exercise to connect your product to customer value drivers to assess value before making pricing decisions.
Intelligent price management follows from intelligent value management. You can’t dive into the pricing world unless you understand the value you’re providing customers.Dan Balcauski
Positioning vs. Branding
Customers always make a trade-off when purchasing a B2B SaaS product—value versus price. The price value map—a perceptual map of market players plotted against relative perceived value and price—helps to understand this price positioning tradeoff. Most markets will have players occupying that landscape’s low-cost, average, premium, and luxury regions of the map.
Your positioning helps make your differentiated value clear to your prospective market. Branding tends to be more important in B2C markets, but in B2B SaaS, positioning is more critical.
Packaging Has Outsized Impact on B2B SaaS Pricing Success
Most SaaS executives think what you charge will determine success, when who and how you charge determines your success. While pricing focuses on what you charge, packaging refers to how you charge.
I define SaaS packaging by these four questions:
- What unit of value are you charging your customers for? This answer is your price metric—for example, the number of API calls or seats.
- What is your pricing model? Is it subscription-based or pay-as-you-go? Defining how you’re charging a customer is critical.
- How do you bundle your features? The most common are good, better, and best tiers, but a modular approach may be better for your situation. Don’t forget about add-ons. Well-defined bundles make it easy for go-to-market teams to explain which offer best suits a prospect and for prospects to self-select into an offer.
- What are your pricing fences? Identity, time, and volume-based fences are typical in pricing. For example, you may offer different pricing for non-profits, quarter-end discounts, or large-volume orders.
The four elements of packaging are significantly more important than the price level. They are harder to change but more impactful if you get them right.
Your SaaS Pricing Focus Evolves
No B2B SaaS leader I’ve ever met says, “The product’s finished. We’re all good here.” Your product’s value and market are constantly evolving. Pricing and packaging are no different.
Pricing needs to be a part of the conversation from day one, but the focus changes. Initially, you will likely focus on being profitable on a unit economic basis. Later, your focus shifts to long-term profitability, where the definition of long-term can change depending on your company’s size, scale, and lifecycle stage.
More people become involved in pricing decisions over time. A startup’s founders start in charge of pricing. However, SaaS companies often experience several changes that bring more people into the pricing conversation as they grow. For example, they outgrow their initial target customer profile, launch internationally, or become multi-product. These situations, combined with organic employee growth and specialization, bring more people into the process, increasing the complexity of pricing decisions.
So who should own pricing with this increasing number of stakeholders? Product Marketing is best suited to own pricing in B2B SaaS. At some point, you may have a full-fledged price manager, a director of pricing, or a pricing team.
I recommend having a pricing council because it is cross-functional. A pricing council brings together executives and stakeholder leaders from Sales, Customer Success, Finance, and Product. A committee with a designated leader with the decision authority can build a process that all stakeholders agree with and implement more efficiently.
Unconventional SaaS Pricing Recommendations
Toss Product-Market Fit
Product-Market fit (PMF) is a term VCs invented to provide a more acceptable way of saying “no” to a startup’s investment. Other than that, it has dubious value. There’s no agreement on measuring PMF, and it’s a rear-looking indicator like revenue. Revenue tells you what happened and is the last metric you want to look at to tell you what to do next. PMF is also rear-looking, so even if you find a way to measure it, it doesn’t tell you what to do. As an operator, it’s useless.
You don’t drive looking in the rearview mirror and don’t want to run your business with rear-looking indicators.Dan Balcauski
Any argument made for Freemium is better answered with a free trial. A free trial has a clear decision moment where a trial user goes from a “hot lead” to an “also ran.” A Freemium motion drags on forever with no clear decision point. Free trials make your sales motion straightforward for your GTM team.
Stop A/B Testing Your Price
B2B sales is an extended process where multiple stakeholders are involved in the purchasing decision. You can not show a different price to different people from the same company who are each visiting your pricing page without causing significant problems. Besides, you’re unlikely to get any statistically significant results from A/B testing pricing on your pricing page.
A/B testing the price of your product is neither transparent nor consistent, which goes against effective pricing for B2B.Dan Balcauski
You can use A/B testing to test highlighting specific bundles as “most popular” or changing display order. But don’t determine the price of your product by A/B testing.