I recently sat down with Paul Heller, host of the Innovation+ Talks podcast, to delve into the world of pricing and its crucial role in a SaaS company’s success. From understanding your product’s value to effective customer segmentation and packaging, pricing is a complex and often overlooked aspect of a business. But as we cover, getting it right can make all the difference.
In this podcast, you’ll learn:
- How to understand value through the Value Cascade and Jobs-to-Be-Done frameworks
- The impact of customer segmentation on pricing and packaging
- Critical considerations for packaging a software product
- How to tell if your pricing is working or optimized
There was so much value we had to split it into two episodes. You can listen to the full episodes below. Or, read on for a recap of our discussion.
and Part 2:
What Do People Get Wrong About SaaS Pricing?
People often get pricing wrong because they focus too much on the actual price and not enough on the overall pricing strategy, packaging, and the needs and context of their target customers.
This perspective leads to sub-optimal results because how you charge (e.g., price metrics and offer configurations) is more impactful than the actual price. It is essential to focus on understanding customers and creating value for them, as this will inform effective pricing and packaging decisions.
What Is Value?
We can understand value through the use of two complementary frameworks:
- The Value Cascade, which breaks down value into three categories: Use Value, Exchange Value, and Perceived Value
- Jobs-to-Be-Done (JTBD)
Use Value is the potential benefits a customer could receive from a product. We can break it down into three categories we get from the JTBD framework:
- functional or economic value, which helps a person do a task more efficiently or with higher performance;
- personal value, which relates to how a product makes someone feel; and
- social value, which relates to the broader impact a product has on humanity.
Exchange value (or economic value) compares a product’s value to the value of the Next Best Competitive Alternative (NBCA). This differentiation is what creates your product’s pricing power. Perceived Value relates to how customers perceive the value of a product. It is crucial to understand and manage value to price a product effectively.
Can customers assess the absolute value of a product? No.
Still, customers make relative comparisons based on factors such as the product’s perceived quality, brand, or features. Breaking down value into specific categories and understanding how they relate to a customer’s needs and context helps customers understand the value of a product and informs effective pricing decisions.
How Does Customer Segmentation Impact SaaS Pricing?
Customer segmentation divides a market into different groups of customers with similar needs, characteristics, and contexts. Understanding and identifying specific customer segments is essential to effectively target and position a product and inform pricing and packaging decisions. Proper segmentation helps map product features to specific buyer types and create coherent offer configurations or bundles.
If you’re a startup, be careful about the lessons you learn from Fortune 500 companies. Your executives may say, Microsoft/Amazon/Walmart serves everyone.” But they didn’t start that way.Dan Balcauski
What Is Packaging for a SaaS Product?
Packaging is a crucial aspect of pricing a software product and includes four components:
- the price metric (the unit of value being charged for),
- the monetization or price model (how and when payments flow through the system),
- offer configurations or bundles (sets of features grouped to create offers for specific customer segments), and
- price fences (different prices for the same product based on customer identity, time, and volume).
Properly considering these elements can help to create a pricing plan that aligns with business objectives and the value you provide to the market.
How Can You Tell if SaaS Pricing Is Working or Optimized?
To determine if your pricing strategy is working effectively, ask yourself and your team high-level questions to gauge how well you meet your goals and KPIs. These questions can include the following:
- Were your planned prices and volumes achieved?
- How large are the deviations between your list and transactional prices, and do you understand why?
- Is pricing causing you to lose deals, or are other factors at play?
- Are there any pricing-related frictions in your portfolio between your operating units, market segments, or products?
For specific metrics, you can also look at your overall discounting percentage, whether you have a discounting policy, and if you are enforcing it. Additionally, you can use statistical analysis to understand the reasons behind your discounting percentage and see if it is being applied consistently across different circumstances, such as volume or order size.
For subscription businesses, it is also essential to look at metrics such as gross and net retention and see if there are any issues with expansion or upsell opportunities. Lastly, it is vital to regularly review your pricing strategy to ensure that it aligns with your overall business objectives and the value you are providing to the market.
Treat pricing as a process rather than a one-time activity. The value a company provides to customers is constantly changing, as is the competitive landscape. Therefore, it is essential to regularly revisit pricing to ensure that it reflects the current value being offered and remains competitive in the market. It is also important to give someone ownership over the pricing process to ensure you give it the necessary attention and focus.