The right price for your product falls in a sweet spot that factors in cost, competition, and the value a product provides your customers. But most managers, so enamored with price level, forget to understand the importance of SaaS packaging to their overall pricing success.
I recently discussed these issues with Laurier Mandin on his Product: Knowledge podcast. Laurier, CEO of Graphos, is a product marketing veteran with more than a quarter-century of experience. Read on for a deep dive into the real, beyond-the-hype process of SaaS pricing.
What is SaaS Packaging?
Pricing is not a single decision. It’s an intricate web of interrelated decisions.
Dan Balcauski
When thinking about pricing and packaging, many managers focus, to their detriment, only on the price level. However, packaging can be even more impactful to your long-term success in the monetization world. Packaging refers to the multiple ways SaaS companies monetize their products. SaaS packaging has four distinct components. Let’s drill down into each of them.
- Price metric. A price metric is the unit of value that a customer pays for. For example, a night at an Airbnb or a Big Mac are pricing metrics we encounter daily. Whether your SaaS price metric ends up as the number of users, API calls, or amount of data transferred, your price metric and revenue go hand in hand.
- Price model. Also referred to as a monetization model or business model, with this component, you might charge customers for a subscription, ask for a one-time transaction, or use a pay-as-you-go approach. In B2B SaaS circles, this can also include a freemium model, which companies use to entice free users into a paid subscription over time.
- Offer configurations or bundles. The “Good-Better-Best” approach is prevalent in the SaaS sphere. The offer configuration model groups different features into discrete sets—for example, the “base model” or the “luxury package.” In this way, your customers aren’t paralyzed by choice as they try to pick and choose from an overwhelming number of feature options.
- Price fences. Price fences are when different customers pay different prices for the same product. Managers can create price fences based on volume, time, or identity differences. Think of all the times you’ve paid less for a matinee showing at the movie theater or bought toilet paper in bulk from Costco instead of individual rolls from the corner store. Same idea.
Should my SaaS packaging include Freemium or a Free Trial?
In the B2B SaaS world, the Freemium model has eternal appeal, especially with technical startup teams that aren’t comfortable with marketing and pricing. I have spent a fair amount of time looking into its pros and cons and have personally decided that freemium is, in most cases, not the most effective way to go.
Companies are always trying to acquire new customers, and there’s always this temptation in Freemium that comes from a giant pool of free users: How can we convert them to paid users? But it’s an illusion.
Dan Balcauski
Among many drawbacks, the freemium model falls victim to “the penny gap.” The penny gap refers to the harsh reality that the move from “free” to “one penny” is an infinite increase in price. Surmounting this hurdle is akin to starting the entire user acquisition marketing motion again.
By contrast, I’ve found that a 14 to 30-day free trial offers a much less ambiguous model with which to entice customers. Not only do customers get to enjoy the whole experience of the product, but the end of this trial forces the client to make a choice that clarifies the product’s value, the client’s needs, and the company’s future.
Why you Shouldn’t Pursue Every Customer in Your Market
How do you assign a dollar value to your product and convince your customers that it’s in their best interest to pay that amount? The first thing to understand is that not all customers are the same. Different customer segments have different needs and thus value your product differently. These differences are reflected in the willingness to pay between customer segments.
There are costs and risks to any market that you’re going to pursue. You need to look at which segment is going to be the most profitable, the most winnable, the most worthwhile in the end.
Laurier Mandin
I like to approach customer segmentation by way of military analogy. As generals look at a battle plan, they consider which hills they can take. What are the costs and benefits of taking each of those hills? Understanding where you’re going to commit your resources – where you’re going to play and win – is the essence of strategy.
Just as in any military struggle, your success largely depends on how well you understand and choose your target customer segments. For example: Does a customer segment balk at the prospect of paying an extra few dollars for a new feature? Or is the difference a rounding error in their company’s budget?
In qualitative research and surveys, you can use tools like the Van Westendorp Price Sensitivity Meter (named after the Dutch economist who invented it). They can give you a better idea of the pricing terrain before deploying your new pricing strategy into battle.
SaaS Pricing is a Process
In the end, remember that pricing is not a static, singular act. As your product evolves alongside your market, your product’s pricing will benefit from regular reassessment. All well-run companies realize that any repeatable, reliable output in their business needs a robust process. Pricing is no different, so treat it like the rest of your business and implement a process with clear ownership.