Bryan Whittington is the founder and CEO of Evergreen Business Services, a firm dedicated to helping entrepreneurs grow their businesses. I sat down with Bryan to chat on his podcast, where we discussed the importance of SaaS pricing for growth.
We also covered:
- How to determine your pricing
- The importance of price integrity
- Pricing impact on scale
You can listen to the full episode at the link below. Or, keep reading for a recap of our discussion.
Why do SaaS Companies Ignore Pricing
As a CEO, you can grow profits in your company in three ways:
- Selling more (either by acquiring more customers or upselling/cross-selling to existing customers)
- Reducing costs
- Optimizing pricing
The first two options are more tangible and straightforward, making them more attractive to managers than the third option. Pricing, however, has a drastic impact on both top-line and bottom-line growth—so why aren’t more businesses focusing on its optimization?
In most companies, every functional area of the business is a stakeholder in pricing, but none are owners of it. No one will feel empowered to touch it without a designated person or team to take ownership of pricing and its processes. And because it’s crucial to every function and pricing changes are emotionally charged, it doesn’t get touched.
Many may assume that Sales should own pricing. Sales, after all, understand the perceived value of your product, which informs price setting. However, their short-term interests in beating their quarterly revenue quota are often misaligned with the business’s long-term profitability goals.
In software businesses, I recommend that Product Marketing own pricing. They are in a unique position in the organization where they are close to customer insight, the value of the product, product positioning, and the strategic needs of the business. The PMM leader should lead a pricing committee consisting of other functional stakeholders to ensure you take all views into account around this vital aspect of the company.
One reason pricing gets ignored is that everyone has a strong opinion about it—and they’re all different.Dan Balcauski
SaaS Pricing Evolves with the Product
One of the fundamental mistakes of pricing is thinking of it as a one-and-done exercise. But that’s not how any other part of a successful business operates.
Product managers, engineers, and designers continually evaluate and update their products and ship new features.
If you think pricing is the one thing you can touch once and never touch again, think again. The value of a product is enhanced and updated with each new feature and improvement. It’s savvy business to update your pricing to reflect these enhancements.
Pricing is not a one-and-done exercise. It must reflect changes in value.Dan Balcauski
Your SaaS Company’s Stage Influences Your Price
The stage of your business will significantly influence your pricing approach. For example, in the earliest stages of your company, pricing is not your most important strategic lever.
You’ve just developed your product, trying to find your first customers. Your primary objective at that point is finding product-market fit. Are you selling something that solves people’s problems? Have you built a robust acquisition model? Do you understand the value proposition that resonates with that market?
As you’re trying to attract your first customers, it’s tempting to undervalue your product and set a low price. But you should never give your product away for free. You must always charge something because, at this stage, you’re after validated market feedback.
A person who does not pay for your product becomes a user, not a customer, and their feedback cannot give you a clear signal from the market on whether you’re on track. Thus, rather than giving your product away for free, offer customers a temporary discount from your regular price.
As your company grows, these dynamics will change, and you might begin seeing diminishing returns from some of your growth channels. Or you may be releasing significant new functionality that could be a new product or separately monetized add-on. Or you’re trying to sell to a new market segment. At these points, optimizing your pricing could be your best option to continue accelerating your growth.
Protecting Your SaaS Pricing Integrity
Pricing your product at a discount can be necessary from time to time, but be cautious and know what purpose the discounts serve. Implement discount policies and guidelines so that your company will have guardrails around pricing.
Before you offer discounts, even in a crisis, challenge your team to get creative in exploring how you can create more value or provide additional products or services at the same price. You want to avoid setting a precedent of price-dropping with your customers—this lowers your pricing integrity.
Protect your pricing integrity first by aligning your team with the value you are creating. Then, by ensuring that your discounting policies are well-defined and followed.
If you told me that we need to cut our price, as your CEO, I would ask you to tell me five other things we can do without first cutting the price.Dan Balcauski
Understand Your Customer’s Emotional Drivers
There’s an enormous benefit in understanding your customer’s ultimate goals when pricing your product.
Your product’s list of features and benefits should include how your product touches your customers on an aspirational level. What are the emotional drivers that lead people to your product? To hone in on these trigger events, conduct customer interviews to get inside your customers’ heads and discover their desired outcomes.
A customer’s perceived value of your product determines their willingness to pay for it. Marketers have a lot of control over perceived value, and understanding your customers’ desired outcomes is a significant lever in improving that perception.
Ultimately, tie the price to the value you can communicate to your potential customer. Listen to your current customers so that your sales and marketing teams can learn how to share that value with potential customers better.
Customer Segments Dictate SaaS Pricing
For SaaS pricing, start with understanding your customer segments.
Your customers are heterogeneous, each valuing your features and value drivers differently and, ultimately, valuing your product differently. Your customers also have different competitive alternatives available to them.
Since pricing is a function of positioning, you must understand who you’re serving and your unique value proposition. The strength of your positioning will differ for each customer segment.
When setting up your pricing strategy, ask the following questions:
- What are your customer segments?
- What are the competitive alternatives for each customer segment?
- How are you going to position your product to win against its competition?
How you answer these questions will be critical for setting up the proper pricing and packaging approach for your company.
Who and how you charge determines your success more than what you charge.Dan Balcauski
Priced to Scale
Almost every decision in a company involves a pricing decision. When you hire talent and negotiate their salary, you’re making a pricing decision. When you decide how to sell your product, you’re making a pricing decision. When you determine your marketing and advertising spend, you’re making a pricing decision.
There’s no part of scaling a company that does not involve making pricing decisions.Dan Balcauski
There are three ways for SaaS companies to scale: Acquisition, Retention, and Monetization.
Monetization can be a massive hack for scaling a company. Successful monetization requires creating, quantifying, communicating, and capturing value.
Pricing is not just a single decision. You should think of monetization as a set of interrelated decisions. Which price position are you going to occupy in the market? How does your pricing metric align with customer value? How do we create workable price discrimination between customer segments? You should guide all these decisions in line with your overall company strategy.
Getting your pricing strategy right is a crucial part of growing your business. But despite it having a drastic impact on growth, pricing is often an afterthought with no clear ownership. Ensure you have a pricing process, a committee of involved stakeholders, and a designated leader to own pricing decisions.