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Practicing the Sweet Science of SaaS Pricing Without Getting Your Nose Bloodied // Science of CX Podcast

Your B2B SaaS company is not meeting your overall goals (e.g., gross or net retention), and you suspect your pricing and packaging are wrong. You might be correct if:

  • You don’t have a pricing strategy.
  • You haven’t revisited and updated your pricing in a while.
  • You don’t have a pricing leader in charge of product decisions.
  • You’re trying to convert users from a freemium model.
  • Your pricing strategy starts and ends with what goes on the price tag.
  • You’re optimizing your pricing to capture market share.

I joined Steve Pappas on the Science of CX podcast to chat about what not to do with your SaaS pricing and which common traps to avoid.

You can listen to the full episode below. Or, read on for a recap of our discussion.

Product Pricing as a Tool & Key Indicator for Business Growth – Science of CX Podcast

Don’t Leave Your SaaS Pricing Unattended

Pricing isn’t generally the primary focus of a newborn SaaS company. The founding team typically spends less than one day on their initial pricing and packaging. 

A game-changing pricing and packaging approach requires time to build, so it’s okay to focus on covering your costs and getting your product out there initially. Unfortunately, SaaS companies leave their pricing alone for far too long after deciding on their initial approach.

The core reason is the lack of pricing leadership. As more stakeholders enter the conversation about pricing, everyone has a say (and, unfortunately, an opinion) on the best pricing approach for their departmental goals. Without clear leadership and an appointed decision-maker, pricing gets sidetracked, then sidelined. 

So who should lead the charge? Product Management has too much on its plate. Putting Sales in charge of pricing differs from positioning the company for long-term profitability. Pricing is a function of product positioning. Product Marketing already owns product positioning and is the best option to lead the pricing decisions.

SaaS products are never really done. The same goes for pricing. This evolution requires you to be proactive with pricing.

Don’t Focus Only on the SaaS Price Tag

When I talk about pricing and packaging, clients get overly excited about the first part and gloss over the second. Packaging isn’t disconnected from pricing. Instead, it is integral to better pricing decisions. Successful packaging results from identifying the product’s price metric, pricing model, offer configurations, and pricing fences. 

The price metric is the unit of value the customer pays for—seats, the amount of data stored, or API transactions. 

The pricing model is how payments flow through your company for the product you provide. Think monthly subscriptions, pay-as-you-go, or a one-time perpetual transaction with yearly maintenance charges.

Offer configurations are how you group different features to help customers self-select the right offer that is appropriate for them. Instead of giving users a toolbox with all the tools, bundle the tools for fixing a chair or installing a new wall clock. Often in SaaS, we see this in terms of good, better, and best tiers of pricing with different add-ons.

Pricing fences are the least talked about. Price fences are how you charge different prices for the same product to different customers. They come in three primary forms: Volume, Identity, and Time. Look at the typical examples of pricing fences for SaaS companies.

  • Volume: The first seat I’d buy has a different price than the 1000th seat on a unit basis.
  • Identity: Students pay a discounted monthly subscription fee compared to regular users.
  • Time: Quarter-end discounts for a product are more than discounts available on the first day of a quarter.

Packaging focuses on how you will charge your customers, which is far more critical than what you will charge. The number on the price tag is easier for you to change and ultimately less impactful than your packaging. 

SaaS Pricing Strategy is About Tradeoffs

Getting pricing right requires understanding your customer segments, the value you provide with your product, and what competition you’re facing. Understanding these foundational pricing aspects lets you capture your differentiated value in the market and leads you to profitability.

Even if there’s not an exact one-for-one tool that does what you do today, we’re always competing against something, even if it’s a customer’s internal process. 

Dan Balcauski

Your differentiated value shapes your pricing strategy, which is about trade-offs. 

  • Which customer segments are we best suited to serve? 
  • How do we position ourselves in the mind of our targeted groups of customer segments to make our differentiated value clear?
  • How does that trickle down to all the previously mentioned packaging elements?

Strategy is about hard trade-offs and saying “no” to options. But then again, if it were easy, it probably wouldn’t be much of a differentiated strategy!

Free-for-All Madness: Freemium, Free Trials, and Free Tools

Economists refer to software as an experience good. Your perception of the value of an experience good changes as you interact with it. You can only appreciate the product’s full power once you use the software. This fundamental concept explains the widespread use of Free Trials and Freemium models. 

The Free Trial sales motion creates a burning fuse. You have to decide in 14-to-30 days whether or not the product is valuable enough to purchase. There is a clear timeline for sales teams to convert a free trial user to a paying user because there is a clear decision point. 

At the end of that trial period, you’re paying to use the software, or you’re not using it. Freemium creates a mirage of a pool of users who are not as easy to convert as they seem to be. When moving customers from free, we run into the penny gap. The penny gap is moving a customer from free to even $0.01. This gap represents an infinite percent increase in price and generally costs the same as acquiring a new user.

A side note to this conversation is about free tools. Unlike a free trial, a free tool is often a slimmed-down single-function tool. It may mimic some of the end-user benefits of the larger paid product, but companies usually build them from a separate codebase and perhaps a different UX. 

Free tools users enter a marketing drip campaign for the full paid product. Beyond that, Sales puts no additional into converting those people. You shouldn’t treat them as a hot lead and thus minimize wasted effort from Sales. 

Don’t Optimize for SaaS Market Share

One of the top mistakes B2B SaaS companies can make as they prepare to jump into the marketplace is assuming profitability follows market share. In reality, it’s the opposite: market share follows profitability.

The most successful companies do not necessarily have the most significant market share in their category. The most successful companies created a premium product catering to specific, dedicated groups of people who will return because of the high value they get from the product. 

Apple, for example, has about 9% of the smartphone market, but the segment they control is the most profitable. Southwest is similar in that it’s nowhere near the leader in its category by market share but has been the only profitable airline in the US for the past thirty years. 

I steer SaaS companies away from a pure market share goal and instead towards the goal of identifying and serving their core customer segment with an incredible ROI. When you deliver an excellent ROI, you have the opportunity for higher prices. 

You say, “But Dan, can’t I just use a low price to capture as many customers as possible?” In that case, you risk customers using price as an indicator of the quality of your product because they’re uncertain about the solution you’re offering or the ROI it will create for them. 

Do the legwork that will help you understand the customers you can serve best.

Want more B2B SaaS pricing and packaging insights? Follow Dan on LinkedIn and Twitter.