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Pricing is Simple But Not Easy // Saas Scaled Podcast

By December 6, 2023Podcast, Pricing, Value

I appeared as a guest on the SaaS Scaled podcast, hosted by Arman Eshraghi, CEO and Founder of Qrvey, a provider of embedded analytics for SaaS applications. Arman and I discussed pricing questions you should never ask, what to ask instead, if companies should publish pricing on their websites, and more.

Pricing is Simple, But Not Easy. Dan Balcauski Answers Hard Questions

What do people often get wrong about price?

My list of things they get wrong could be pretty long, but the number one thing that I see time and again with SaaS pricing is most executives think that what you charge determines your success. In fact, who and how you charge determines your success. I can’t tell you the number of conversations that start with, “Hey, we’re trying to figure out what to price this product. Is it $19 a user? Is it $29.95? Should our price end in fives or nines?” And look, I love those conversations. They’re super fun and interesting, but they’re focused on the wrong area. That would be what we call the price level.

Much more important is who you’re charging. What’s the ideal customer set that you’re going after? Because there’s no average customer. There’s no average value. Everyone has a particular context and, therefore, will value your product differently. So, you must be very clear about who you’re going after. Who are we pricing for? You should never ask what the right price is, but what is the right price for whom?

The question is meaningless if you don’t fully complete that sentence. And then how we charge, including all the elements of packaging. My general advice: I would spend most of my time on what the price tag goes on and much less, if no time, on what number goes on the price tag.

Are organizations dedicating enough time & attention to pricing? 

Absolutely not. There are only three ways to grow a SaaS company:

  1. Acquisition
  2. Retention
  3. Monetization

Acquisition gets all the play, over and above retention and monetization. And that may be shifting a bit with the macro environment where folks realize that some of the net new acquisition is tapped out.

Why does monetization tend to get ignored?

New business is hard to come by, so people may shift a bit more to retention. And then monetization is often looked at as this black box magic voodoo. There are many reasons for that. There’s a misperception. People believe monetization, or pricing and packaging, is this art. Well, it’s an art and a science, but it’s much more science than art. You need both.

We need the elements of understanding economic theory and how people make decisions. But then also there are aspects of psychology. We know this as good marketers.

Also,  the problem is that poor pricing is not as apparent on the P&L as other aspects. You can see bills from vendors and work to reduce spending. But what’s not showing up on the P&L is if you’re charging $20 per seat, but you should be charging $200 per seat. That 10X of revenue that should be appearing, no one’s getting a bill on their desk saying you missed out on all this revenue this month because you’re massively underpriced. It’s an invisible sort of opportunity cost. 

Humans tend to be biased on availability and recency, focusing on what’s most prescient at our fingertips and what we have evidence for. Some people may feel monetization is just guessing anyway, which is invalid.

How do you define perfect pricing?

I don’t know if perfect pricing exists in the universe. I’ve not seen it yet. Pricing is a journey. It’s a process, not an event. I think about what effective pricing looks like in a couple of ways. Effective pricing and packaging ultimately helps you capture fair value for the value you deliver to customers and maximizes your company’s long-term profitability. 

Long-term value is in the eye of the beholder. A Fortune 100 company may be thinking about a 10-year timeframe or more, whereas the startup that’s worried about making payroll this quarter might have a much shorter “long-term.” That being said, are we creating a fair exchange of value?

One of the ways philosophically to think about price is that it’s really how a buyer and a seller divide value in a transaction. We’re going to create ten units of value. I’m going to take one of those units as the seller. I will give you nine, and you feel happy in that transaction. This is one way we think about pricing. Ultimately,  there are a few characteristics of good pricing. 

  1. Fair
  2. Consistent
  3. Transparent

Generally, I dislike the idea of A/B testing pricing, especially in B2B. This is one of those areas where B2C concepts are brought over into B2B and are just a terrible idea. It violates all three of those fundamental principles of good pricing.

Is free ever a good price?

Whenever someone mentions freemium, the better answer is a free trial. Free trials are an excellent idea. When trying a product, something in our animal brain lights up in a way that it doesn’t for just reading about it. Economists classify goods and services in different ways. Software is an “experience good,” meaning that our perception of the thing’s value changes when we experience it. Free trials enable you to engage that.

Freemium, on the other hand, does that, but it has a whole bunch of other adverse side effects, and it gets taken to an extreme. Let’s go back to discussing how price is merely how value is divided between a buyer and a seller. If I give you something free, what does that say about how valuable I believe what I’m giving you is? So, we run this extreme risk where we teach our customers that our product has no value. That’s a dangerous game. 

The best benchmarks I’ve seen is that about 1% to 3% of freemium customers convert to paid. So, what does that mean in a B2B context? It means don’t adopt a B2C strategy for B2B because for 1% to 3% to have a meaningful impact on your business, you need a massive market.

 In many ways, freemium creates this massive illusion, a mirage, and causes a bunch of dysfunction. With 97% to 99% of your user base on the free side, these people will not convert. These are not your people. So much time, energy, and effort are wasted because we run into “the penny gap,” the idea that when we go from zero to one cent, that is an infinite increase in price. So, the activation energy to get someone to convert that penny gap is nearly as much as finding someone off the street and trying to get them to buy your product.

Should companies be fully transparent & publish pricing on their website?

It depends, but I will tell you what it depends on. Stats on this are difficult to come by. Unfortunately, the best stats I’ve seen have an error range, but about 50% to 75% of B2B SaaS companies have public pricing and packaging. And I saw a stat that SaaS unicorns are twice as likely to publish their pricing as non-unicorns.

There are a couple of bad reasons I hear for not publishing pricing:

  • We’re afraid our pricing is too high or too low
  • Our competitors will get easy access to our pricing information
  • Our pricing doesn’t represent our actual price because we discount so much

Those reasons signal there are other significant issues for your company to resolve. Those are symptoms stemming from a lack of a sound pricing process, a good value proposition definition, and a robust go-to-market strategy or sales process. So, you’ve got those reasons masquerading as justification for not publishing pricing, and you should be laser-focused on fixing them.

Remember that if all of your competitors have public pricing and packaging, you’re the odd man out. It’s a bit of a fool’s errand to think, “Well, we’ll just have our sales team qualify, and then we’ll be able to show them the right pricing and packaging.” If all of your competition has transparent pricing and packaging, you won’t end up on the shortlist. Your sales team is never going to be in that conversation. It can feel to prospects like you’re hiding something.

Scenarios where not publishing pricing might be appropriate include:

  • Complex packaging or consultative-type products that require a salesperson to walk through
  • High difference in willingness to pay between segments
  • A small addressable market

What are some key considerations when raising prices?

We want to think through a couple of strategic areas as we drive towards long-term profitability. One is the apparent issue: some customers may churn or feel gouged. They may feel it’s unfair, so we want to be sensitive to that. It could potentially impact your NPS or referrals. 

We want to think through that rollout plan, ensuring that marketing enables the sales team with proper justifications and give-gets so they can handle the negotiations appropriately. We need clear lines of communication between those frontline folks, whether it’s customer success dealing with renewals or new business sales, and the senior executive team and pricing committee. Pay attention to the reaction from the market, customers, competitors, and partners, as these changes are rolling out so you can make real-time adjustments. 

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