Discover more from Productize
'Finger in the Air' Pricing Strategy.
Why it's crazy and 6 things to consider to generate more revenue.
Apparently, the average amount of time most SaaS companies spend on their pricing strategy per year is 6 hours! Compare this to how much time they spend on their new business strategy. But of all the growth levers you have, pricing is the most impactful.
Why do people so little time on pricing ? Well, partly it’s a fear that changing the pricing will unbalance something precarious. And partly it’s because we don’t know what to change it to and why. As a result we base our pricing on a mixture of gut feel and guesswork. Guessing your pricing is insane. You are almost certainly charging too little and therefore leaving money on the table. Think about it, if your pricing is even 10% less that it should be, how much money have you already lost? And how much would you pay a sales person to win you that missing 10% ?
But there are some things you can do to optimise your pricing based on real data rather than gastrointestinal superstition. And we should be constantly reviewing prices. Not once a year, not once we do a big release, but constantly. Here are 6 considerations when it comes to defining your pricing strategy:
1. Choose your model
You can look three ways to choose your pricing method: Inward, Sideways or Outward.
Inward - is ‘cost plus’ pricing. In other words, how much does it cost us to provide this service, plus the margin we think can get away with.
Sideways - or ‘competition’ pricing. Let’s see what the competition is doing and base our price point on that.
Outward - or ‘value based’ pricing. What do our customers actually value and what is their willingness to pay based on that?
For B2B SaaS, value based pricing is the best strategy. It will allow you to really dig deep into what your customers genuinely want (and therefore value) and not leave money on the table because you were too worried about what the competition were doing.
2. Buyer Personas
You have to understand the customers who care the most about what makes you special. Personas should be as much as possible based on numbers rather than words otherwise a persona document becomes a vanity box ticking exercise with little in the way of useful application. So think things like size or turnover of business, size of budget, number of customers etc.
3. Feature Value Analysis
The only way to really know for sure what your customers value is to ask them. Unfortunately this takes time. But for both existing customers and prospects, it’s important to ask them which of your features they value the most and which they value the least. You should carry out a survey with all your key features and ask them to indicate one choice for each. Then for each feature add up positive and negative votes to get a net number. The highest numbers are the features they value. If you can talk to enough people and divide the answers by personas then even better.
With this info you know both which features to hone in on your positioning, but also want to highlight in your pricing page (if you have one).
4. Willingness to Pay
Whilst you’re at it, you could also ask them a series of questions that give you a sense of their willingness to pay. The four questions that Price Intelligently (a pricing consultancy use) are:
What would be a price (for this product) so expensive that you wouldn’t buy it?
What would be a price so low that you wouldn’t have confidence it would be any good?
What would be a price that starts to feel too expensive, but you’d still consider it?
What would be a price that you would consider a bargain?
You can then plot a price range somewhere in the middle of the total answers. Again, you may need to split this by Persona.
5. Value Metric
Final thing to consider is what Value Metric you are using for your pricing. Examples of value metrics are things like number of licences, number of employees, number of customers, number of emails sent .. basically whatever proxy you use to set the price. You may be able to link this back to the Features Value Analysis. For example, if you have an HR tool and the key value from the customers point of view is what it does for the employees, then maybe the Value Metric is around employee seats. If the main value is about what the administrators can do, then the Value Metric might be better focused on the number of admin user licences.
When it comes to packaging up your pricing, the work above could help you define some of the areas. This example below shows one of the tiers from Box. The Buyer Persona could be called whatever, but this tier is for one of their Personas or ICPs (depending on the business).
The Willingness to Pay is expressed as the unity price against a Value Metric in this case: ‘number of users’. Then for this Persona, the most important feature is the organisation-wide CMS. For reference, the highlighted feature on the tier below was ‘Team Collaboration’ and for the tier above was ‘Advanced CMS and Data Protection’. So you can see how they’ve understood how the core values that people care about change based on the Buyer Persona.
So there you have it. Turns out pricing isn’t an estimation of what you can get away with after all. Who knew?