Have you ever wondered what Gilligan’s Island has to do with SaaS Pricing? Well, you’re in luck. I got to discuss this and a lot more recently with the amazing Nils Davis on his podcast, The Secrets of Product Management. We had so much to talk about he had to split it into two separate episodes.
In this two-for-one podcast value extravaganza, you’ll learn:
- What people most often get wrong about SaaS pricing
- How customers’ perception of risk affects your pricing
- How SaaS CEOs cede control of one of their most powerful growth levers to competitors
- How pricing varies across product and service categories
- How emotional value drivers impact B2B pricing
- How companies should price innovative products
- And, of course, how SaaS pricing has a lot to learn from Gilligan’s Island
- And much more
Listen to the episodes below:
Notable Quotes from the Episode
One way to illustrate the shift from use value to exchange value is with the example of Mr. Howell and Gilligan’s Island. For those who are unfamiliar, a group of people becomes stranded on an island. Mr. Howell is a millionaire, or perhaps a billionaire in today’s dollars. When a ship arrives to rescue him, the captain could charge Mr. Howell anything because his money is useless on the island. The overall use value has stayed the same, but with the arrival of a second ship, neither captain can charge Mr. Howell his entire net worth as negotiations now come into play. The focus shifts to reference prices and the amenities offered.
The problem with competitor-based pricing is that this approach outsources your pricing department’s work to your competition. CEOs wouldn’t entrust their demand generation strategy or product development roadmap to competitors, but some are comfortable allowing competitors to dictate their pricing.
A company’s long-term revenue is derived from the value it provides to the market. There might be short-term manipulations or schemes, but they eventually catch up to you.
One misconception is that pricing exercises for hotels, airline seats, consumer packaged goods, software, and stocks are all the same. While some fundamental economic realities exist, the details vary significantly across industries.
I focus on B2B products. Most of the work focuses on understanding those functional or economic value drivers and concentrates there. As you get into B2C, that’s where, if I buy Tide or the Kroger generic version of Tide, there’s a premium I will pay for Tide because of the brand. There are more advanced market research instruments you could use to measure how much people value things like a brand as a soft, intangible asset. We could think about the brand as satisfying a sense of trust. For example, when I go to McDonald’s, I know what I will get.
This concept in the value cascade of exchange value: exchange value is your positive or negative differentiation compared to the next best competitive alternative. My first question would be, are software dev tools actually the next best competitor alternatives? The next best competitor alternative isn’t your version of what you think your competitor is. It’s what customers think is the best alternative.
Evian facial spray is water in an aerosol component. It’s basically water, and they charge $2.50 an ounce. I often get pushback from technology leaders about pricing, claiming that it’s just done this way in their market. I remind them that Evian managed to charge $2.50 an ounce for water, which is the most commoditized market. This demonstrates the power of pricing that most managers don’t appreciate.