Michael Luchen is a product management director, agile coach, and host of The Product Manager podcast. I joined Michael on his podcast to discuss how to make the right SaaS pricing decisions and why people get stuck when they start looking at pricing.
We also explored:
- Pricing orientations
- The mistakes to avoid when starting SaaS pricing conversations
- The importance of customer segments to SaaS pricing
- SaaS Pricing ownership
You can listen to the full episode at the link below. Or, read on for a recap of our discussion.
Ingredients for the Right SaaS Pricing Decisions
Pricing is multidimensional. SaaS pricing depends on your market dynamics, cost structure, company and product life cycle, and competitive environment.
When starting a company, pricing is not your most important lever. Although you need to charge something, your focus should be on ensuring you’re creating and delivering value.
It is essential to start thinking about your pricing orientation early. A pricing orientation encompasses the philosophy of how you design pricing and packaging approaches at your company. Pricing orientations fall into three categories: cost-based pricing, competitor-based pricing, and customer value-based pricing. These will inform the inputs you’ll look at in your pricing process.
When I first sit down with SaaS companies to help them establish a pricing approach for their business, I introduce them to my four-part model to help them determine an optimal pricing process:
- Understanding your customer segments
- Articulating the value you create
- Identifying your competitive alternatives
- Making strategic pricing decisions given the first three inputs.
The first three steps are the inputs that filter into the fourth step.
If you follow these steps, you’ll better position yourself to make the right pricing decisions and establish a pricing and packaging approach that will resonate with your customers over the long run.
Where Companies Get Stuck When Tackling SaaS Pricing
Clowns to the left of me. Jokers to the right. Here I am, stuck in the middle with you.Stealers Wheel, Stuck in the Middle with You
Companies tend to get stuck on pricing because they don’t know their goals or who they are trying to target.
Before you begin the pricing process, you must have a specific goal. First, consider what you’re trying to achieve with your pricing. Is it maximizing profit, revenue, market share, or gross margin?
Getting executive alignment about what you’re trying to achieve is essential before tackling pricing.
The second mistake I see companies make is beginning pricing conversations without a clear idea of who is buying their product. Understanding your customers is a critical element of pricing. The customers you sell to today are not homogenous. Different customers will have different value drivers, determining how they value your product.
It’s essential to consider the difference between your competition and the value you create. Your customer segments may have different competitive alternatives, so your pricing power comes from your differentiated value versus your competition.
Often, conversations around pricing get very confusing because companies don’t have a clear view of their target customer.Dan Balcauski
Approaching Customer Segmentation for SaaS Pricing
You should look at your potential market rather than just segmenting your existing customer base. This expansion in perspective will give you a sense of the overall market landscape, not just what customers you’re currently acquiring.
Most people seem to have difficulty seeing past variables like demographics (e.g., age, gender, and income) or firmographics (e.g., company size, geography, and industry vertical). These are good places to start, as they can help socialize the idea of segmentation among executives and that all your customers are not homogeneous. Also, don’t hesitate to gather customer insights from those on the frontline of your company – the sales team and customer service team. If you talk to a salesperson or a customer representative, they will know quickly who is a good prospect and who’s not. These insights should inform the segmentation exercise.
Why is it important to understand how those different segments differ regarding their customer needs and values?
Pricing is a function of your positioning. You could have a very unproductive debate among the product management team because no one had the higher-order conversation on segmentation. There’s no agreement on which customer you’re serving. So, get to know the customer you are serving and the relative prioritization of those customers.
The faster you realize the importance of customer segmentation, the easier the pricing exercise becomes.Dan Balcauski
Do You Need a Pricing Expert in Your Company?
Given pricing decisions’ complexity, is it worth bringing in a dedicated expert to help navigate those conversations?
Typically, SaaS companies don’t hire a full-time pricing person until they reach $400 million in revenue. Before this, most companies rely on Product Management and Product Marketing, as they’re usually well-positioned to help drive the pricing conversation forward.
If no specific team or individual owns the pricing strategy in your company, there are always opportunities to bring the conversation up. Who owns the pricing process de facto is often less important than who takes the initiative and does the work.
As senior leaders are often overwhelmed, they’re always looking for people who can step up and do the pricing analysis and build the business case. If you’re in the Product Management or Product Marketing space, you’ll often be in touch with competitive analysis and have a good insight into your company’s strategic needs.
Before your initial pricing conversations, have a clear idea of your company goals and your different customer segments. Rushing to make pricing decisions without such considerations will put you in a tenuous position as your pricing will not likely reflect your product’s value or the end goals of your business.
Understanding your customers’ different value drivers and metrics is key to smooth pricing decisions.
Although you don’t need to hire a dedicated pricing expert for your company, have a specific team or individual with good strategic insight into your business and market who takes the initiative to lead the process forward. Because of their proximity to the customer, product positioning, strategic goals of the company, and competition, Product Marketing and Product Management are typically best positioned to provide such insights.