5 Things to Avoid While Pricing SaaS Products
Marcos Rivera, founder and CEO of Pricing I/O, shares five common things you’re doing wrong when pricing SaaS products. Here’s how to navigate these traps.
Let me take a stab in the dark – you guessed your prices, didn’t you?
You are not alone. Two out of three SaaS companies I’ve worked with confess that they copied a competitor or flat out made up their pricing model.
I took the scrappy path in learning how to price and made plenty of mistakes along the way. But as you build experience in pricing, you correct these mistakes over time. And fewer mistakes could result in a meaningful revenue boost for your SaaS business.
Last year, I worked with 106 SaaS companies looking to rethink their pricing strategy and correct past mistakes to unlock growth and boost customer lifetime value. And in doing so, I uncovered a trove of poorly calculated guesses that resulted in a longer, headache-filled path to growth.
I want to save you time and headaches by telling you the five deadliest and most common mistakes in pricing a SaaS product in B2B.
Here they are in no particular order:
Mistake 1 – “Let’s double our prices and see what happens”
Random testing in the form of price doubling is dangerous. It’s a finger-in-the-air guess that won’t get you closer to the ideal monetization model for your specific product, value proposition, and customers. You would also rob yourself of a golden opportunity to learn what drives your customer’s perception of value. Some customers will be upset to realize they are paying double for the same thing and lose trust in the relationship.
The better approach is to systematically raise your prices over time as you build and release more value into the market. More value can come from new features, better onboarding, a better user experience, or lightning-fast customer support. Testing higher price points with new packages with more value aimed at a specific audience is the way to go. However, doing so without reliable data or a clear purpose will lead to random outcomes and, at worst, won’t teach you anything.
If you want to raise your prices, here are three questions to consider to inform your decision and guide your data collection efforts to avoid guessing:
- What percentage of sales pushed back on your price last year?
- How does product usage compare to expectations?
- How much more are customers buying after the initial purchase?
SaaS models are relationships, and relationships rely on trust. You can’t build trust with guesswork. So do your homework and raise prices based on reality, not a random whim.
Mistake 2 – “Let’s price by slapping a margin on top of our costs.”
It’s algorithmic, seems fair, and is easy to calculate in an Excel spreadsheet; therefore, it is the perfect way to monetize, right? Well, there’s one problem.
This approach disconnects the prices from value. And in the software game, where the value changes constantly and increases over time, you leave hard-earned money on the table by taking this route.
From what I’ve seen, this approach ends up charging everyone the perfectly average and perfectly wrong price. And in most cases, you are too expensive for the smaller customers and too cheap for the larger ones.
It is better to look at your capture prices’ distribution (like a histogram) – the real price customers said yes to and are paying. This data will give you a better idea of how different price points align with groups of buyers with different willingness to pay.
There is no such thing as an average value, so don’t charge based on average costs, especially in Software as a Service.
Mistake 3 – “Let’s build a fancy price calculator.”
A pricing calculator, on the surface, seems harmless or even a good idea. But beware. Calculators make the math easy, but connecting the price to value is still up to you. If your pricing model is a “black box” that uses some mix of mysterious “factors” to determine prices, then try again. Black box models make it difficult to explain how prices are right or wrong, and they usually lead to random discounts and difficulty forecasting future prices.
And if your pricing calculator applies across multiple products with different value propositions, then hit the reset button. In most cases, this type of calculator is challenging to maintain as you build out your product value with more functionality, integrations, and services.
Remember this: If a salesperson cannot explain the pricing calculation to a 10-year-old, then go back to the drawing board.
See More: Will SaaS Enable a Paradigm Shift in Business Travel?
Mistake 4 – “Let’s wait until the last minute to tell them about the price increase.”
For pricing mistakes, this is one of the worst blunders out there, and it breaks my heart every time I come across it.
The idea is to give customers little-to-no notice of the pricing change, so they don’t have time to shop the competition or go to RFP.
Well, it’s time to cash in your reality check!
A price increase out of left field would give customers a good reason to look elsewhere, even if they renew for now. If you ask for a raise, you should have a good story about why you deserve one. Examples of value proofs that show the “why” behind a price increase are the latest product enhancements, improvements in the pace of innovation, investments in support or customer success, or advancements
in onboarding, training, self-help, performance, or security.
No one likes a price hike, but most customers would understand if they are getting more value than they initially purchased.
Mistake 5 – “Let’s grandfather all clients into the old pricing forever.”
Grandfathering customers into the old pricing model is often a retention tool or reward for loyalty. But some use grandfathering to kick the can down the road and avoid the perceived pushback from existing customers. Unfortunately, this approach leads to a ticking time bomb of operational headaches and poor economics.
Working with many B2B SaaS companies, I’ve seen the best results with the grandfather discount that expires anywhere between 6 and 24 months. It is an effective way to balance the impact of ARR and attrition. An expiration “clock” on the discount is essential to move customers up the value curve over time. But, the longer they are on the old pricing, the harder they are to move up.
When pricing, do what it takes to avoid the guesswork and commit the same pricing mistakes I’ve shared. If you stay away from these growth killers, you are already halfway down the path to capturing more value.
How do you think SaaS professionals can figure out the right pricing strategy to unlock growth and capture value in B2B and enterprise software? Let us know on Facebook, Twitter, and LinkedIn.
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