I enjoyed discussing the ins and outs of SaaS pricing on the Humans of Martech podcast with hosts Phil Gamache and Jonathan Taylor. This episode explores the importance of identifying customer segments, understanding competitive alternatives, and delineating value drivers for each segment. We also dive into how willingness to pay is not a universal constant and the flaws in traditional usage-based pricing models. Join us as we discuss the critical components of value-based pricing and why it’s essential to understand both traditional economics and behavioral economics.
Phil and Jon created maybe the best recap blog I’ve seen for any podcast I’ve been on, so I highly encourage you to check that out as well. And I’m partial to my new digital avatar 🙂
We also cover the following:
- The Taxi Meter Effect
- Subscription-based vs. Consumption-based Pricing Models
- Willingness to Pay and Behavioral Economics
- Value-based Pricing and Feature-Benefit-Value Mapping
- Value Metrics and Price Metrics
Timestamped Outline
[02:34] SaaS pricing challenges addressed through the “Services (SVCS) model.” [06:16] Value and price metric correlation in pricing. [12:32] Value-based pricing requires understanding perceived value. [21:24] Willingness to pay is a psychological construct. [27:46] Usage-based pricing has separate packaging concepts. [33:02] Beware of the taxi meter effect in pricing. [37:23] Bundling and unbundling to make money. [41:27] Pricing metrics must align with value and innovation. [45:35] Understanding customer segments for travel services pricing.Potent Quotables
Value-Based Pricing vs. Outcome-Based Pricing:
“Could a CRM, for example, charge customers based on the number of deals closed? We would call this outcome-based pricing. So I think this is a very nice philosophical purity of the value-based model: we’re completely aligned as the vendor with our customer success. It tends not to work very well in practice.”
— Dan Balcauski
Understanding Value-Based Pricing:
“Nobody cares about your features. Nobody cares ultimately about your product. They care about the benefits and value they get from your product.”
— Dan Balcauski
Understanding Customer Willingness to Pay:
“Willingness to pay is often seen as a static number, but really a customer’s willingness to pay can fluctuate based on a bunch of different factors that are impacting the business or impacting their current budget.”
— Phil Gamache
“Willingness to pay is not an answer to a math problem. It’s an expression of a desire or a guess about what other human beings will do. It’s a psychological construct like happiness, but we can estimate it and observe its effects in the outside world.”
— Dan Balcauski
Usage-Based Pricing:
“One of the drawbacks that’s been highlighted about usage-based pricing is this idea that it might create a disincentive for users to fully exploit and engage with the product when they’re always conscious about this idea of the meter running.”
— Phil Gamache
Pricing Metrics:
“Ultimately, you’d like a pricing metric that aligns with customers’ business requirements and perceived value of the product, allows the company to capture fair value, predictably, minimizes operational friction between the buyer and the seller, where sort of both sides can exert reasonable control over the metric.”
— Dan Balcauski