The Art of SaaS Pricing for Early-Stage Founders
The most successful growth lever for a compounding effect on your SaaS businesses is not what you think it is. Pricing seems to be the ugly duckling in growth levers with people thinking about buzzwords like, PMF or CAC, far more often than their monetization strategy. (You can tell what’s a sexy topic or not depending on whether or not the word has an acronym).
But let me tell you something: If there is one growth lever that deserves its own VC buzzword, it’s pricing. The way you price your SaaS product can make or break your business, so it’s worth exploring all of the different pricing models to find the one that works best for you.
To make your life easier, we’ve decided to break it down for you. Finding the right SaaS pricing for your business boils down to a decision hierarchy that includes the pricing strategy, the pricing mechanics/types/model, and the pricing tactics.
What's the true value of pricing?
Pricing is intrinsic to your business because of its ability to drastically improve the foundational numbers of your business. That is, your unit economics. Here’s how CAC can be affected by an efficient pricing strategy.
An optimized pricing strategy leads to an optimized funnel. If you position, package, and price effectively, then a significant part of your sales and marketing job are done. Without an optimized pricing strategy, your CAC will be high, because you'll be attracting the wrong prospects who don’t fit with your value. This quite literally indicates that the right pricing strategy will optimize for growth.
Now that the stage is set, let’s dive into it.
Common SaaS strategies to identify the right model
When thinking about pricing, the first and most important thing that your clients are thinking about is one thing and one thing only: The value your product brings to their business.
We’ve seen far too many SaaS founders try out all sorts of complex strategies to identify the right pricing mechanics for their business. So we’ll cut to the chase for you. In SaaS, the only viable strategy is the value-based pricing method.
Your SaaS startup exists to offer value to your customers. Keep it simple and focus on just that: your customers’ needs. By finding out how much your prospective clients are willing to pay for your product and what features they want to see you develop, you’ll be able not only to give customers what they want, but also attract and retain these customers, all the while making more profit. A few tips to get a leg up here are to use the competitor-based method as a baseline and work your way from there.
However, keep in mind, it’s not just about the number on the page but the access that each package/bundle provides them. This approach to pricing will help you understand what your customers truly want and which features should be prioritized in development. So it’s most important here to ‘Get to know your customer’.
The foundation of your entire pricing strategy
Founders tend to confuse knowing who their customers are with actually understanding their customers' needs. When creating buyer personas, vague adjectives and nice photos are only good for decoration. Companies cannot succeed in SaaS without a data-driven buyer personas. If the data within your buyer persona provides you with no way to calculate your unit economics, re-iterate and replace those adjectives with actionable data, such as valued features, willingness-to-pay, size, and unit economics. See the infographic below.
From there, test, evaluate and reiterate. How often should your pricing be re-evaluated? The answer is continuously. We tend to advise our founders to re-evaluate their current pricing structure at a minimum of every three months and try to make pricing changes every six months. It’s also an exercise that requires input from almost all departments within your team (Marketing, Sales, Product, and Management).
Building the right package for your target client
Once you have a clear understanding of who your customers are, you’ll be able to prioritize your product roadmap based on value and then package them in a way that resonates with your target audience. In other words, choose which pricing model will work best for your SaaS business. This will inevitably help you avoid wasting time on unnecessary or superfluous features and instead focus on the core value you provide to your clients.
Below are the various pricing models for SaaS businesses. Depending on which model you decide to go for, the question regarding whether to use a monthly or yearly plan will arise. Our Platform+ team led a study that showed that 82 percent of companies offer a monthly subscription versus only 59 percent offering a yearly subscription plan. The hypothesis to be kept in mind here, is that a yearly subscription leads to lower churn.
Traversing the psychology of software purchasing
Software purchasing hides behind a layer of psychological tricks. (Read more on this here.) A well-designed pricing page can make all the difference in converting website visitors to paying customers.
Once you have conducted your market research effectively, each buyer persona can be translated into your differentiated plans/bundles on your pricing page. In simple terms, what you are trying to communicate on the webpage is that as customers get more from your product, they can move up tiers. And as they do, you can capture more value and revenue from them in return.
June’s pricing page is effortlessly clear and friendly. It clearly outlines the ideal customer for each pricing plan/bundle as well as the value and benefit that each one offers. Each bundle is set up side by side, making it easier for users to evaluate and choose the most suitable option for their needs. For each package, they also provide a help section and the possibility to set up a free consultancy/demo, which creates trust.
Keep in mind, pricing touches on all parts of your business and feeds back into every department. So to get pricing right, you need input from every group in your company to build and sell better. Having this in place is already a huge competitive advantage.
How to communicate pricing to clients
At Speedinvest, we advise our founders to build a matrix listing out the key concerns for each customer group with regards to the price being too expensive or too cheap. Prior to communicating or negotiating pricing to your clients, your market research needs to have covered the below questions. So once you approach your customers, you know where to position yourself and negotiate from there.
- Too expensive: At what price point would you consider our product to be so expensive that you would not consider buying it?
- Expensive: At what price point would you consider our product to be so inexpensive that, while not out of the question, you would give it some thought before buying it?
- Single sign-bargain: At what price would you consider our product to be a great deal for the money?
- Too cheap: At what price point would you consider our product so inexpensive that you feel the quality couldn’t be excellent?
The goal is to make your pricing seem the most reasonable to your consumers. After all, it's really all about tricking the eye. Use words related to small magnitude around the pricing page. For example, low maintenance and high performance.
Position the pricing in such a way that the clients would choose the more expensive option to retain product quality. Our portfolio company, Gitpod, who uses a usage-based pricing model, does this very well by providing its prospective clients with a ‘Pricing Calculator’ right below the various bundles to make it easier for the customers to understand how much value they can get
Maximize on features and value
The value-based pricing strategy is unique to your company and therefore returns the maximum value for your product and customers. Determining the prioritization of features for your product roadmap on the basis of willingness to pay, mitigates against sinking engineering time into superfluous features. By prioritizing features on the basis of customers' willingness to pay, you avoid wasting engineering resources on unnecessary functionalities allowing you to optimize the value delivered to your customers while maximizing returns.
In short, to ace your pricing strategy, it is imperative to gain a profound understanding of your customers’ needs and pin-point the precise areas where your product can genuinely and uniquely provide them value. Present this value in a clear, simple and transparent way on your website.
So get strategic and make those profits soar!