In this guest post from the team behind SaaStock, Patrick Campbell from Price Intelligently offers some valuable tips on finding a SaaS pricing structure that works for you.
Fun fact: Patrick Campbell, co-founder and CEO of Price Intelligently, found out that on average companies spend a mere eight hours pricing their product.
That’s eight hours over the company’s lifetime.
Don’t do that. Instead, learn this:
- Pricing is the exchange rate for the value you’re creating for your product – it’s that important
- Pricing decisions should be customer-centric and data-driven
- Lastly, your product’s price is dynamic
Pricing is your SaaS product’s exchange rate
Everything about your product – development, marketing, etc – drives customers towards the decision to purchase or not purchase. All that work justifies the price. It’s the exchange rate of the value of your product.
As the eight-hour statistic shows, people don’t spend nearly enough time thinking about how they want to value that exchange. But it’s important.
Consider the three pillars of business:
Product pricing (monetisation) can have a two to four-times greater impact on revenue over acquisition and retention.
Not just that, but the age of paying a little cash for a bunch of solid leads is coming to an end. It’s more expensive and there’s more competition for the same customers. It’s crucial that you make money from the customers you do have.
Companies that do well have good frameworks for retention and monetisation. This is simple math: if you keep customers around forever, you have to make them cost-effective.
Companies that started out promising but are now struggling (let’s call them ex-unicorns) acquired lots of customers quickly but didn’t focus on the interaction between retention and monetisation. They’re retaining customers that ultimately cost them money.
Campbell described an example of a product that costs a customer $360 a year but generates $1m in revenue. That customer is costing the product seller $14,000 per year to retain. That doesn’t add up.
Product pricing should be customer-centric and data-driven
So, how do you price your product? Campbell recommends getting as much quantitative data on your potential customers as possible. When you understand your buyers on a deep level – their problems, their needs, and their willingness to spend – you can align your product and pricing to their expectations.
Another part of deciding how to price is knowing how your customers want to purchase. Then, provide them with a pricing option that lets them buy how they want.
Per-unit pricing is a leftover habit from the days of purchasing physical things. This isn’t always the right strategy anymore.
Focus on defining the right value metrics. Value metrics are units of value that you price – like clicks, or log-ins. You could price per user (then end up with 30 people sharing log-in credentials), or you might try pricing per click, per lead, or per 100 site visits.
When your pricing is right, your business expands because customers move up through different value metrics as they grow and get more value from your product.
Price is a dynamic part of your product
As your product improves and brand grows, your price should keep up.
For years, Evernote users had unlimited access to notes across devices, getting huge value from this free service. Recently, they raised their basic subscription price from free to $4. The $4 increase was small for the user, but very valuable for Evernote’s sustainability.
Campbell advises companies to adjust pricing sooner rather than later. People get accustomed to using something for free. To the same end, he recommends changing something about your pricing every six months. This doesn’t necessarily have to be the price, but could be value metrics or subscription options. If you introduce pricing early and keep it flexible, you can respond with more agility (and less customer anguish) when you have to change the price.
Don’t throw pricing out into the market randomly to see what works. Instead, understand what your customer needs and how they want to buy, and price accordingly. Then stay flexible.
A version of this article originally appeared on SaaStock.com