Dr. Jürgen Strauss is the founder of Innovabiz, a company dedicated to making your marketing human again. I sat down with him to chat on his InnovaBuzz Podcast, where we talked about the critical connection between SaaS pricing and understanding your customer segments inside and out.
The Most Common SaaS Pricing Mistake
One of the most common mistakes I see with SaaS products is too much focus on what you charge, the price level. Who and how you charge determines your success, not your price level.
Getting caught up on the price level without considering different customers and their contexts can make the pricing conversation impossible. Consider pricing one of the world’s most ubiquitous commodities: water. Water doesn’t have a consistent value across contexts. Imagine the value in use of water in these three different contexts:
- Imagine you are wandering in the desert, dying of thirst, desperate for even a single drop to quench your thirst and ensure your continued survival.
- Clean tap water spills out of the pipes in your beautiful home, flooding your kitchen.
- You’re on a road trip and stop at a gas station to quench your thirst with a bottle of water.
In each context, water has a very different value. In the first case, you might be willing to pay any amount of money for life-saving water. In the second, the water has a negative value to you. In fact, you will spend significant amounts of money for a reputable plumber to get rid of it. In the third, you shell out $3 for plastic and water you could get for free at home. It’s no wonder Evian is “naive” spelled backward.
If the value changes so dramatically for a simple product like water given different customer contexts, imagine how different your SaaS product’s value, and therefore price, change for your different customer segments!
Most executives think what you charge will determine your success. But it’s actually who and how you charge that determines your success.Dan Balcauski
Segment Your SaaS Customers by Value
There are two ways you can approach segmenting your customers:
- The A Priori Approach. This approach considers the existing, observable characteristics of the customers in question, like industry or company size. This approach focuses on “Who customers are.”
- The Post Hoc Approach. This approach considers the existing, unobservable characteristics of the customers in question, like situations, motivations, obstacles, and desired outcomes. It’s a value-based segmentation approach. This approach focuses on “What customers want.”
With the A Priori approach, you focus on characteristics that divide the market in already understood and straightforward ways. Think about different company sizes, different industries, and so on. Those are interesting places to start, but they don’t get at the actual differentiating characteristics of why customers buy.
The Post Hoc approach focuses on what the customers want, what they’re trying to achieve, and what issues they face. Things like business size and industry are usually irrelevant here. Are your customers wandering in the desert, dying of thirst, or are they irate in their kitchen, scrolling Yelp for available plumbers to clean up a soggy mess?
What is the context your customers are in? What barriers are in their way? What’s the outcome they’re trying to achieve? When we look at the market from an outcome lens, it helps give us a good idea of why particular customers bring products into their lives.Dan Balcauski
Your customers are hiring your SaaS product to do a job. That job can be functional, emotional, social. Different customer segments will have different jobs they are trying to complete in their lives. Maybe they want to save time, perhaps they want to reduce team anxiety, or perhaps they want to give back to the community in some way. Customers hire your product to do a job. Understand that job holistically.
Your SaaS Product Creates Value by Satisfying Customer Outcomes
Companies use three SaaS pricing and packaging orientations: cost-based, competitor-based, and customer value-based. A customer value-based orientation is the most effective direction. Of course, you need to care about your costs and keep up with what your competitors are doing, but don’t use those to drive pricing in isolation.
Most companies start with a cost-based model where your cost of goods sold costs X, but you want some predetermined margin, so you’re going to charge the market 4X. But that’s not relevant to customers. That’s a fundamental mistake a company makes when they use a cost-based model.Dan Balcauski
Consider the value to your customer as the primary focus for your business. Talk to your customers and listen to their situations and contexts. Try to unearth the outcomes customers are trying to achieve, and focus your energy on helping them achieve those outcomes.
You have to learn to look past the surface-level request from customers. For example, a customer says, “I want a big, pink button here.” Figure out what it is about that request that will help the customer be more successful. Find out the motivation behind your customers’ thoughts and desires with your product.
My definition of innovation is breaking a previous constraint. Deeply understanding the constraints that exist for your customers is an excellent place to start. Once you know what those constraints are, you can begin to figure out how and where to apply pressure with your innovations to break them.
Align the Outcomes of Your Business with Those of Your Customers
If you take away anything from my chat with Jürgen, it should be this: Align the outcomes of your SaaS business to the outcomes of your customers.
Take ten minutes to reflect on your ideal customer segments and what outcomes you hope to enable them to achieve. Then write down what value you see that having and what value the customer will attribute to that. Being clear about these things will help you shape your pricing and packaging going forward.