🧠 Are you charging enough for your SaaS product?

This week is all about how to evaluate your product offering and decide on a pricing strategy that goes hand-in-hand. Failing to keep the two in sync as your product evolves can lead to a lot of revenue being left to fall between the cracks.

This week in IdeaHub…

• Pricing models explained:
  The most common SaaS models with examples to help you decide which fits your product best

• How to price your product:
  Practical steps in maintaining an effective pricing strategy as your product grows

• Supercharging your pricing:
  3 strategies to increase total revenue without any new customers

Let’s jump in… ⬇️

1. Pricing models explained

Software products are notoriously difficult to price. The main reason being that there is a lot of variation in the cost base of the vendors that sell it.

Corporations that spend millions every month on providing a service for their customers have a very different set of challenges when it comes to pricing that say, a bootstrapped indie hacker does.

So when we’re looking for comparisons in the marketplace, it can seem challenging to know who to lean on.

I’ve chosen the 3 most common pricing models to look at, so let’s get the rundown:

 Value-based pricing

This is my area of operation.

As a product manager and tech lead in the risk & compliance industry, I build a lot of solutions for customers with the sole purpose of saving them from hefty fines if they fall out of compliance with a particular regulation.

This is great as it allows us to assign an intrinsic value to the software based on a potential cost-saving (which can reach seven figures! 😬).

If I sell something for $100, I want to provide at least $1,000 in value to them… at least.

The 10X rule - Lincoln Murphy of SixteenVentures

But this also proposes challenges for us as a vendor as different customers exposed to varying levels of risk may be willing to pay different amounts to save their skin.

However, this can be applied to almost any software where the customers purchasing intent is outcome driven.

For example, if selling a marketing automation tool means a customer can save $100K a year, they will be willing to pay more than just your average $99 a month!

Consumption-based pricing

Vendors that adopt a consumption-based model tend to be those whose costs have a direct correlation to platform usage.

One of the best-known examples is Google Maps. Customers that want access to data for everything from route planning to address validation pay a cost that scales with the number of units of work they request.

Here’s 3 other examples across the tech stack that you could research if you think a consumption model is for you:

• Amazon Web Services
  Riddled with complex pricing matrices, most AWS services offer a ‘pay-as-you-go’ option - here’s an example

• Stripe
  Payment provider that takes a percentage of the total transaction value to cover costs associated with managing the infrastructure required to make it possible

• HubSpot Marketing Hub
  Marketing automation and campaign tools for businesses where pricing scales with total contacts

Consumption models can be particularly favourable for low-usage customers who often pay next to nothing so for SaaS vendors who operate in this way, that cost is usually made back with enterprise deals.

Attractively, however, a consumption model can provide agility to vendors who are free to tweak pricing to maintain a healthy margin as costs fluctuate.

 Per-seat pricing

Being able to predict platform costs ahead of time is the most significant advantage of a per-seat (sometimes called ‘per-head’) pricing model for your customers.

It’s simple to determine that if headcount grows by X, costs increase by Y which can increase a customer’s willingness to purchase compared to complex usage-based models.

But this works both ways, if a vendor’s business scales directly with active users, then it makes sense to make that metric your customer’s primary cost lever and incentivise them to turn it.

Here’s 2 examples of rigorously tested per-seat pricing models:

• GitHub
  As tech companies usually scale headcount to grow, it makes sense for GitHub to employ per-seat pricing

• Slack
  A communication software provider that uses a nuanced model in that they only charge for active users, reducing wasted subscriptions

Beware though, as high-growth customers can be averse to this model if headcount grows rapidly. So if startups are your market, maybe avoid this if you can!

2. How to price your product

Keep it simple, stupid

In reality, most established vendors employ a combination of models to service their entire offering.

But when your product is early, pick one model and stick to it. Focus on improving your core value proposition and don’t muddy the waters by introducing complex pricing just for the sake of it.

You also need an element of competitive pricing for early products. If you're offering a new or alternative way of solving a problem, customers need to be convinced to be early adopters.

You should know who the closest three competitors are to your product and what they charge for a similar service. If you want to attract their customers to use your solution instead, consider pricing roughly 10% lower.

The right way to use pricing tiers

Pricing tiers look sexy on a landing page, but in reality, their purpose in SaaS should be to provide a more tailored experience for a segment of your customers.

Each tier should aim to maximise the value those customers can derive from your product whilst ensuring all customers are paying the correct price.

When you do this, you can start to really turn your pricing model into a pricing strategy.

By gating advanced features only required by power users, you also create a clear staircase of pricing that your customers can climb up as they grow.

Knowing each segment’s specific needs is therefore essential to creating an effective tiered pricing strategy and therefore it should only form part of a product once that learning process has taken place.

Trial periods

Used to increase adoption, limited-time access to your product can reduce the barrier to entry for new customers.

However, tempting as it may be to use trial periods for new products and get them off the ground quicker, I personally prefer to keep them paid-only for as long as possible.

Forcing customers to pay for a product is a perfect way of validating that you have actually built something they desperately want to use.

At the end of the day, anyone can sign up for a trial, use a product for a week, and then leave at the end of it - it doesn’t mean they really needed it in the first place and can leave you feeling muddled as to why they churned.

Instead, once you have some traction and feel like you have a good understanding of your customer profile, introduce a trial period to widen your sales funnel.

But free trials don’t work for every product. Neil Patel summarises this well, so I’ll leave that up to him!

3. Supercharging your pricing

Nobody’s product extracts 100% of its potential revenue from its customers, it’s a complex equation with too many variables. But there are ways of increasing its efficiency without acquiring any new customers.

Here’s 3 ways you can start doing this with your products:

Increasing perceived value

By continually releasing features that benefit your customers, essentially by either saving them more time or more money, you increase the value that your customers feel like they are getting from your product.

If currently, your product can save a customer a $10K yearly overhead, think of ways to 10X that to $100K.

Ensure that you’re openly marketing this to your customers and making them aware of the new value they can redeem by continuing to use your product.

Once your customers perceive this, increasing prices becomes more of an exercise in reaffirming new value rather than a traditional (and sketchy…) yearly price bump.

Read how Shopify increased prices by 33% for the first time in 12 years, solidifying the new intrinsic value built into the platform over that period.

Identify customer pain points

Recognising the most critical features that each segment of your customer base relies on, and then gating these behind specific pricing tiers is a great way to ensure customers continue to pay more as they grow.

By giving away too much value straight out of the gate, you leave money on the table and let your customers take advantage of you.

Yes, it’s important to overdeliver on your value proposition, but not to the extent it’s costing you precious revenue.

Ensure you tie your price to your customer’s revenue/headcount/usage so that you both succeed as they grow.

 Upsell upsell upsell!

Be continually conscious of your customer’s businesses, what their objectives are and how they plan to achieve them.

Customers will never be as hot on what your product can do for them as you are, so speak to them once or twice a year and hear what challenges they are currently facing.

Doing so gives you ample opportunity to not only pick up on new features but also for “well that is actually possible with X…” type interactions - where X is a key pain point you’ve identified and gated as above.

Once you have that first interaction that leads to unlocking new revenue with just a conversation, you’ll want to be talking to your customers every day!

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Hey! Charlie here 👋, thanks for reading this article! I hope you enjoyed it and learned something new.

Each week I send out discussions like this to over 300 tech peeps interested in building their own software products.

Being a Product Manager in B2B SaaS, I built a lot of software and share my lessons learned that you can apply to your own building journey.

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