Lucinda Faucher is a head of product, business mentor, and host of The Prod Box podcast. I joined Lucinda to discuss how SaaS companies can design the proper pricing and packaging approach to achieve product success and ensure they deliver real value to their customers.
We also explored:
- How effective pricing captures a fair amount of value
- The importance of focusing on your customer outcomes
- The secret to a successful segmentation exercise
- Methods for getting feedback on your pricing strategies
You can listen to the full episode below. Or, read on for a recap of our discussion.
Outcomes Define Value, Not SaaS Features
Pricing and product are two sides of the same coin.
- In product, the focus is on creating value for your customers.
- In pricing, the focus is on capturing a portion of that value.
Ultimately, effective pricing helps SaaS companies capture a percentage of the value they deliver to their customers.
You should focus your value creation efforts on identifying and optimizing an outcome for customers. As such, product and pricing leaders must understand the ultimate results they are trying to create for their customers.
In many B2B SaaS companies, it’s common to see product leaders jump straight into the solution space. They jump into feature specifications, loosely defined by a customer request or internal stakeholder, without understanding how it helps customers succeed. Well-defined customer inputs are the primary driver of a product innovation process. Time spent in the problem space is time well spent.
The key to aligning your pricing strategy with your product strategy is understanding how you’re making your customers successful.Dan Balcauski
Features are only a means to an end. Customers want to achieve outcomes that lead to progress in their lives and their businesses. These outcomes should be the focus of both product and pricing strategies.
If you focus your organization on customer outcomes and create a shared language of value creation, your product and pricing strategies will align and drive favorable results for you and your customers.
Segment SaaS Customers by Their Needs
Customer segmentation is an area that is both simultaneously widespread and misunderstood.
You must understand both “who your customers are” and “what customers want” for a successful segmentation exercise. So, where do you start? With who they are? Or with what they want?
I recommend starting with “what customers want.” This approach results in more actionable data for your business because you can create products and market positioning that speak specifically to a group of users. However, what happens in most SaaS companies is that product leaders focus on only “who customers are.”
This type of a priori segmentation focuses on firmographics like company size, the number of employees, and the industry vertical. However, it doesn’t capture why customers bring products into their lives.
Knowing the whole terrain helps you understand where you’re best suited to play and win.Dan Balcauski
While an a priori can be a good starting point to help the organization and executive stakeholders understand that not everyone has the same needs, this approach doesn’t drive the critical customer insights needed in a pricing exercise.
In contrast, if you take a Jobs-To-Be-Done (JTBD) approach to segmentation, you’ll learn more about your customers’ contexts. This post hoc, or value-based, segmentation will help you understand what drives their buying decisions and how they value your product.
Test, Track, and Iterate on Your SaaS Pricing
Primary market research is vital for getting reliable feedback on your pricing strategies. This research includes interviews and quantitative surveys with current customers and potential prospects. Besides market research, collecting feedback from your internal sales or customer success teams is essential when evaluating current or proposed pricing changes.
Market research is critical in understanding and testing your pricing strategies.Dan Balcauski
Successful pricing does not mean nobody complains about your product’s price(s). On the contrary, this can be a red flag. If no one is complaining about the price, you’ve likely priced your product too low.
A good rule of thumb is that you should lose about a third of deals on price. However, you shouldn’t take the percentage pulled from your CRM Win/Loss codes as ground truth. Make sure to dig further and have conversations with Closed-lost prospects to figure out what is really going on.
You can track several metrics to evaluate your pricing and packaging health. Tracking discounting percentages can alert you if your price is too high or too low. It can also help alert you to other problems like inadequate sales training or price realization policies or enforcement.
It can also be helpful to monitor your average selling price and take rate of your product’s offer configurations. In B2B SaaS, it is common to have good-better-best tiers. You might have a problem if 75% of customers buy your lowest tier.
Achieving the correct pricing and packaging approach is essential to attaining product success and ensuring you’re delivering value to your customer.
Customer insight is at the heart of an effective pricing and packaging approach. Without understanding the value your product delivers to your customer, you won’t be able to capture fair value for it.
Knowing your customers and understanding their wants will enable you to position your product’s differentiated value in a way that speaks specifically to your target segments.
Want more B2B SaaS pricing and packaging insights? Follow Dan on LinkedIn and Twitter.