Pierce Ramirez is a community manager at ProductLed, and co-host of The ProductLed Podcast (Episode Outline). I sat down with Pierce to explore the value of pricing and how companies can optimize their SaaS pricing and packaging for product-led growth (PLG). We also discussed the following:
- How to set up an optimal price strategy that maximizes profitability
- Understanding your customers’ needs through the Jobs-to-Be-Done framework
- The importance of packaging in a product-led growth go-to-market model
- The power of regularly revisiting your pricing
You can listen to the full episode at the link below. Or, read on for a recap of our discussion.
Creating a Process for Optimal SaaS Pricing
An effective price helps your business capture fair value for the value you deliver to customers and enables you to maximize long-term profitability.
How can companies identify their optimal price strategy?
The approach will depend on your company’s stage. Fortune 500 companies, for instance, are at a very different place in their company life cycle than a Silicon Valley start-up with $5 million in yearly revenue. Regardless of your company’s size, however, you should always start the pricing exercise by understanding the value you create for your customers.
Early in a company’s life, you must focus on creating and delivering value, making sure you have a product-market fit. This advice is not to say you should charge nothing. On the contrary, you should always charge something because if you’re giving away your product for free, you won’t get valuable market feedback.
Your price is merely how a buyer and seller divide the value in a transaction.
Dan Balcauski
In many ways, the pricing process mimics every other research process. Start by focusing on your end goal. What are you trying to optimize? Is it profit? Is it market share? Is it revenue?
Once you’ve aligned the team on your goal, execute qualitative and quantitative market research, followed by testing and iteration. Finally, make an informed decision and implement your pricing and packaging.
How Does Your SaaS Product Create Value for Your Customers?
Understanding your customers is a crucial part of establishing an optimal price strategy.
The Jobs-to-Be-Done (JTBD) framework can help understand customer value. It provides insight into why customers buy and enables you to focus on the outcome a customer is trying to achieve and the struggles and constraints they’re facing.
The trick in the research process to uncover a customer’s JTBD is to drive the discussion to dollars and cents. Any conversations about value with your customer will be pointless if you can’t focus on financial value.
The psychological value aspect is also important; JTBD helps us address that. In the JTBD framework, we look at three different types of jobs:
- Functional jobs – What task is the customer looking to accomplish, and how will they measure the success of a job well done? These jobs include outcomes such as minimizing risk, increasing revenue or decreasing time.
- Emotional jobs – includes personal and social job outcomes
- Personal jobs – How do customers want to feel in a given circumstance? These jobs could include several emotional outcomes, such as reduced stress, increased pride, and safety.
- Social jobs – How do users want to create value within their communities? These jobs could include being included or having status in a community. Or for entities like governments or non-profit organizations, it could include outcomes like increased access to education, healthcare, or equal rights.
If you’re booking a vacation home on Airbnb, you will likely want to filter results by price to find a place that meets your budget. That’s a functional job.
A personal emotional job might involve reading reviews from past guests when deciding which place to book. Doing that makes you feel safe staying with this particular host.
At the end of the stay, you might want to leave a review for your fellow travelers, either recommending the place or providing negative feedback. Doing that will elevate your social status within that particular community. This job is an example of a social job.
Effective SaaS Packaging for Product-led Growth
In SaaS companies, it’s common for founders and CEOs to jump straight into pricing without understanding packaging.
Good packaging is simple. It helps increase customers’ ability to self-select into an offering, increasing every sales opportunity’s velocity. This reduction in sales friction is vital because the more time sales personnel spend on a deal, the more it increases your customer acquisition costs.
For product-led growth businesses with a lot of volume and velocity, the focus must be on ensuring your offering is straightforward for your customers. This way, you won’t need a salesperson walking your customers through a full menu of every possible configuration. Non-intuitive pricing and packaging or a 50-page price list that requires heavy Sales involvement can be the death of a volume-and-velocity (i.e., PLG) go-to-market motion.
Good packaging can aid (or hinder, depending on your objective) competitive comparison or differentiation. It can also help your sales reps communicate the value proposition of your product and justify your price.
The Power of Revisiting Your SaaS Pricing and Packaging
OpenView’s survey data shows a correlation between how often companies change a pricing component and how fast they grow. Generally, best-in-class companies change their pricing or packaging every quarter. Companies that make fewer changes tend to grow slower. While correlation isn’t proof of causation, it is evidence supporting the need for more pricing changes than most companies currently execute.
Changing pricing encompasses a wide range of activities. It doesn’t necessarily mean changing your list prices. For instance, it could involve introducing a new monetized add-on module or configuration to your product, revising your discount policies and enforcement, or localizing pricing for international markets.
There’s a broad number of pricing updates that go beyond changing your list prices.
Dan Balcauski
All conversations around price ultimately lead to value, and companies constantly improve their products. So, whenever you feel your product or market has changed enough to merit revisiting pricing, it’s probably a good time to do so.
Triggers that could lead you to revisit your pricing might include:
- Your company is targeting a new market segment you haven’t addressed.
- You’ve created a new set of functionality that you could sell as an add-on module, a new tier, or a new product. As your SaaS product’s value changes, it makes sense to reevaluate pricing.
- You’ve acquired another company and now must rationalize your pricing and packaging approach across multiple products.
- Wage or input cost inflation has significantly impacted your gross or net margins.
- Your competition has significantly changed pricing or the value of their offerings. Remember that your differentiated value sets your pricing power compared to your competitors.
Pricing is a process, and, at a minimum, you should revisit it yearly.
Dan Balcauski
Given the current economic outlook, many SaaS companies are starting to worry about inflation and how that could affect their margins. Many companies, however, haven’t changed prices for five years or more. They are confronted with the current inflation problem and need to catch up with the price changes they haven’t made in the last five years.
Therefore, the way to go is to establish a pricing process, just like any other process in your business, and revisit it regularly. Generally, it makes sense to revisit pricing at least once a year or whenever a change in your product or market necessitates a review.