Pricing - Setting up your startup for SaaS Growth
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Deep dive into Pricing Strategy. Learn the axes available to pull pricing lever for SaaS growth in subscription economy. Understand the influence ASP has on the options available and how to align it strategically across the 3 key SaaS sales model.
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Pricing - Setting up your startup for SaaS Growth
- 1. Pricing Setting up your startup for SaaS growth
- 2. What we’ll talk about • SaaS model • Pricing – the SaaS profit lever • Multi-axes pricing • SaaS pricing strategy and structure • SaaS Sales models • Value Metrics
- 3. We Don’t Know what we don’t know
- 4. What we know will change
- 5. But there are yet many constants..
- 6. SaaS means longer relationships to fuel growth
- 7. SaaS requires a “consumption based” economics approach
- 8. Nothing impacts your bottom line better than improving your pricing.
- 9. SaaS model • Runs on lead source optimization to optimize CAC • Focuses on increasing Lifetime value • Has additional sales motion compared to traditional models
- 10. The “North Star” for software companies is a unified, seamless customer experience with targeted offers and sustained profitable growth.
- 11. So how do we get there?
- 12. Pricing is the SaaS profit lever
- 13. Nailing it • Continuous monitoring to ensure land, expand and retention of customer base. • Consider both rational and irrational sides of how people make purchase decisions • Finding your ‘North Star’ pricing metric • Finding the feature fit for optimizing value distribution.
- 14. Your product is your price and how you price your product reflects value from the buyer perspective as well as what your company believes is valuable.
- 15. Putting it to action…
- 16. And no, it’s not about your pricing page
- 17. Pricing determines • Your market position • If your target customer can purchase from you
- 18. Pricing has two main inputs
- 19. Internal - focused on you Choice Factors Quantity vs quality • More customers or bigger deal size • Land grab or lengthy sales cycle Low end vs High end • Go to market strategy • How to compete
- 20. External - focused on customers • About truly understanding your customers • Defining and validating your ideal customer profile • Patterns to detect market segments • The value that each segment is offered
- 21. Value is key
- 22. What’s In it For Them? • Desired Outcome, Goals, Opportunities, Problems, etc. • don’t emphasize features; emphasize: OUTCOMES. RESULTS. SUCCESS.
- 24. Scalable Pricing • Pricing that scales up or down. • Allows you to capture more of the revenue that your customers are willing to pay, without putting off smaller customers that are not able to pay high prices. • provides a great way to continue to grow revenue from your existing customers.
- 25. Product Features Basic Pro Enterprise
- 27. Usage Basic Pro Enterprise • Storage • Active Users • Mailing List Size • Number of active projects
- 28. How many pricing axes is right?
- 29. Cross-sell Axes
- 30. Ideas • Buy or build additional products that are closely related to existing products • Sell add-on modules that integrate nicely with the existing product • Create an AppStore, and sell third party products, taking a cut of the profits • Create a services marketplace where you connect partners that provide services offerings around your products and take a cut of the transaction fees • Look for other fees that are created around the usage of your product (e.g. payment transaction fees in e-commerce, advertising revenue, etc.), and ask yourself if it is possible for you to extract a portion of that revenue.
- 31. Examples • Per-user (many SaaS products) • Storage (Dropbox) • Project (Basecamp) • Freemium (LinkedIn) • Per item/contact (AppFolio, Hubspot) • Per Node/Server (Hadoop) • Per Visitor/Traffic (AdRoll) • Processor time/Data transferred (Amazon Web Services) • Open Source (free with paid services) • Advertising (Facebook) • Broker fee (AirBnB)
- 32. But how you apply this is really about your strategy
- 33. This is the important bit
- 35. Maximization (Revenue Growth) • Maximize revenue growth in the short term. • Startups should pursue maximization when there are no clear differences in customer segments’ willingness to pay, and when the optimal short term and long term prices are equal.
- 36. Penetration (Market Share) • Price the product at a low price to win dominant market share. • A bottoms-up strategy lends itself to penetration pricing. Price low to minimize adoption friction, grow quickly, and then move up- market after developing broad adoption. • Penetration pricing leads to land-and-expand sales tactics. • Penetration prioritizes market share.
- 37. Skimming (Profit Maximization) • Start with a high price and systematically broaden the product offering to address more of the customer base at lower prices.
- 39. Part Tariffs Tariff Context Example Linear Pricing • Each unit/event costs a dollar value • Metered cabs • Prepaid plans 2 PartTariff • Base platform fee. Usually recurring • Each unit/event/tier costs a dollar value • Credit Card • Club memberships 3 PartTariff • Base platform fee. Usually recurring • First ‘n’ units/events are free. • Each additional unit/event/tier costs a dollar value • Postpaid plans • Uber • HubSpot
- 41. Choosing the right go-to-market sales model for your SaaS startup can be a make it or break it decision.
- 43. What’s your average selling price?
- 44. ASP • The intersection of supply and demand • Measures external factors like customer value and competitiveness • Constrains operational metrics like costs, volume and risk.
- 45. Your ASP places a ceiling on your customer acquisition cost, which in turn limits your SaaS sales model options.
- 46. Price has an inverse relationship to deal volume • Low ASPs require large target markets, more leads, more pipeline, higher conversion rates, shorter sales cycles, and so on to deliver a high volume of customers. • High volume also requires more customer self-service, more automation and less labor, because labor is expensive, slow and has poor economies-of-scale.
- 47. High ASP means high risk • The more risk, the more your customers will desire a personal relationship. • Rare customer will part with a high cost through a self-service portal. • Lacking the brand security of established players, a SaaS startup must put a human face on its service to overcome this fear. • High ASP pays for associated costs to maintain a relationship.
- 48. Complexity Constrains • Price and complexity are natural adversaries. • The more complex the purchase, the more help the prospect will need. And, the fewer choices you will have regarding your SaaS sales model. • Higher complexity means higher costs, thus requiring higher ASP. • Getting the right alignment between price and complexity means ensuring the value customers place on your product always exceeds the price, time, fear and frustration they must pay.
- 50. Self Serve HighValue per account Complex Sales Process • Self-service sign-up • Usage based pricing • Volume discounts • Support depends on spend No business survives here LowValue per account • Request a demo • Annual contracts – high monthly costs • High CAC • SLA + product consulting premium services • Self-service sign-up • Plans around features and users • Low CAC • Minimal support offered • Premium services on top tier plan
- 51. Self-Service • Achieving significant revenue at a low price point naturally entails driving complexity and cost out of the purchase to clear the floodgates for high volume. • The ideal SaaS sales model is self-service. However, this requires that your customers be willing and able to service themselves. • Marketing leads backed by support
- 52. Transactional • Higher ASP brings higher expectations for the business relationship, such as signed contracts, premium SLAs, invoicing, and the ability to speak to a human when problems arise. • Characterized by efficient high volume sales and support operations, short sales cycles, and rapid onboarding • Supported by automation that allows for as much self-service as possible for willing customer
- 53. Transactional • Marketing feeds highly qualified leads to inside sales which is supported by automation, tools, incentives • Support model enables high efficiency and many transactions per rep, complemented by customer self-service tools, templates and educational content.
- 54. Enterprise Sales • Feature-rich suites that automate strategic, core business processes for mid-to-large enterprises • Natural starting point for SaaS that offer that much value per customer and are so complex to buy
- 55. Enterprise Sales • Territory sales reps focused on a narrow set of target prospects directly supported by product marketing and sales engineering resources at a deal level. • High-end marketing that facilitates brand awareness, education, relationship building and trust. • High touch support up to onsite issue resolution complemented by educational tools and training tailored to the specific needs of individual customers.
- 57. You just can’t give away complex software. Only customers that are willing to pay an exorbitant price for your hugely valuable service will also pay exorbitant amounts of time, fear and frustration to wade through the complexity of getting it.
- 58. Graveyard deterrent strategies • Increase Velocity: The goal of this strategy is to reach a customer self-service SaaS sales model by holding your price point low and driving out complexity to build volume rapidly. • Increase Value: The goal of this strategy is to reach an enterprise SaaS sales model by adding value through product innovation and restricting your market to target prospects that see the most value in your offering. • Increase Profit: The goal of this strategy is to reach a transactional SaaS sales model by finding balance between ASP and CAC (customer acquisition cost) through operational efficiency and focus on the most profitable market segments.
- 59. Value Metric - Optimize your strategy for growth
- 60. In its basic form, your value metric is essentially what and how you’re charging.
- 61. Pretty simple, right? Well, coming up with the right value metric is where things get complicated
- 62. Identifying and pricing along your proper value metric is the difference between surviving and thriving.
- 63. For example, Let’s consider a video hosting SaaS product
- 64. Three plans on feature axe ? • What is the impact if everyone got unlimited bandwidth and videos ? • Disney and you can be paying the same cost – whereas Disney would be hosting more videos, consuming more storage, and deriving more value. • Disney would value the service 100x more
- 65. So what should I charge on?
- 66. Ideas • Bandwidth - the more bandwidth I use, the more interaction I’m getting with customers and prospects, and the more I’m willing and able to pay for that interaction. • Number of plays – this is customer value proof-of-concept. Risky but directly links to the ideal scenario that the product facilitates
- 67. Predictability Caveats • “per event” intuitively makes sense, because you can tie value directly to what you’re charging for, but there’s no predictability in the costs per month. • Target (product and marketing decision makers) need predictability for procurement. • You need it for making business decisions.
- 68. Banded Approach - analyze distribution of your customers and essentially use a tiered approach to align pricing to average usage.
- 69. So what should I charge on?
- 70. How to evaluate a value metric? • Does your value metric align to your customer’s need? • Is the value metric easy to understand? • Does your value metric grow with the customer?
- 71. Process • start by running a list of all the axes you could charge along (not feature differentiation, but actual axes). • send a survey or conduct some interviews to determine where your customer ascribes value in your product • chosen value should align with customer’s need, ease-of- understanding and should grow with customer’s growth • Test, iterate, and repeat.
- 72. References • Joel York - SaaS startup strategy • David Skok – Scalable Pricing • Patrick Campbell – The Value Metric
- 73. @anadirajtiwari
Notas del editor
- Prelude as a growth from small stage to product with a product market fit to a startup focused on hyper-growth to a startup focused on profit maximisation.
- key metrics such as Committed Monthly Recurring Revenue (CMMR) and Customer Acquisition Cost (CAC) among others. A new set of demand forecasting and revenue recognition requirements such as usage based billing
- Two independent studies by McKinsey & A.T. Kearney , both concluded that a 1% increase in pricing affects a company’s profits more than any other change. In short, of all the things you can spend time tweaking, pricing will yield the best return. For some reason deploying your product and never changing it seems ludicrous, yet deploying your pricing and never changing it doesn’t. A new set of demand forecasting and revenue recognition requirements such as usage based billing
- That’s what we are going to discuss today.
- Nailing your pricing strategy requires more than just picking the optimal price and forgetting about it. It needs to be continuously monitored to ensure you’re effectively landing, expanding and retaining your customer base. And it needs to consider both the rational and irrational sides of how people make purchase decisions.
- the pricing should scale down to allow you to capture the smallest/cheapest customers that are still profitable, up to the largest customers that are willing pay a great deal.
- If you are going to build a low cost sales model, it will be useful to have a very simple pricing model that the customer can immediately understand. I would argue that this means no more than 3 pricing axes, and perhaps 2 is the optimal.
- Expensify, Netsuite, New Relic, Slack follow this model.
- Apple sells the latest iPhones at the highest prices, and repackages older models at lower prices to address different customer segments. Oracle’s database, Tanium’s security product, Workday’s human capital management software.
- For the first ten years of SaaS, the linear pricing model dominated. Recently, 2PTs have emerged, but are still uncommon. However, several academics argue the 3PT may be the optimal strategy especially when the number of vendors in a category is small. 3PT reduces competition in commodity markets, but increases it in markets with a differentiated product in favor of it. That’s because 3PT pricing mechanisms capture more value from the buyer. SaaS startups with differentiated products can reinforce their competitive strategy with their pricing, aligning the 4Ps of Marketing. 3PTs capture more value because customers tend to buy larger plans than they might need. Customers choose flat-rate or three-part tariffs with large allowances even when these entail a greater bill than tariffs with a lower allowance
- If your ASP is $500 annual recurring revenue (ARR), then you are unlikely to be able to fund a direct sales force, because your sales rep would need to sell 1000 deals per year to come close to covering your customer acquisition costs. Whereas if your ASP is $500,000 ARR you only need to close a single deal, so you can afford to fly out and wine and dine your prospect to your hearts content.
- You can make every effort to eliminate complexity, but at any given time the amount remaining must be surmounted by your SaaS sales model. For example, a new social collaboration SaaS may appear so foreign that prospects have difficulty understanding what it is, let alone what it can do for them. Onboarding a SaaS ERP might require the customer to alter internal business processes before any value is realized. In both cases, it will fall to your SaaS sales model to help prospects navigate the complexity.
- Sticking a $5/month price tag on your product might lead you to believe it is affordable for everyone. Far from it. Low pricing rules out lots of potential customers, in the same way serving $3 steaks in a restaurant actually restricts your clientele.
- Your competitive advantage has to scale as you move upmarket. A complex sales process for low value customers is never a viable business, no matter how many start-ups try it. It’s like selling $2 hot dogs in a world-class high maintenance dining room. The numbers won’t add up. As we’ve covered before, low pricing alone isn’t disruptive, it’s just cheap. Going for the lower left means you usually end up with a high amount of low value customers. This limits how you can acquire customers. Dropbox, for example, learned the hard way that they could never afford to acquire customers by advertising. Low pricing also limits how much support you can offer. Woothemes learned they can’t afford to support certain customers.
- Sales: None. Marketing: Full revenue responsibility, creating awareness, educational content and automation capable of driving business through the entire purchase process from awareness to close. Support: Provides automation and tools for easy on-boarding, plus templates and educational content that allow customers to resolve any issues they encounter on their own.
- When complexity forces you into a SaaS sales model where the costs exceed your ASP, your business is destined for the SaaS Startup Graveyard.
- In its basic form, your value metric is essentially what and how you’re charging. If you’re Help Scout help desk software, you’re charging for each seat per month. If you’re selling MacBook Airs, it’s each MacBook Air one time up front. If you’re Wistia, you’re charging for number of videos hosted and the amount of bandwidth those videos take up each month (a dual value metric).
- If you’re Help Scout help desk software, you’re charging for each seat per month. If you’re selling MacBook Airs, it’s each MacBook Air one time up front. If you’re Wistia, you’re charging for number of videos hosted and the amount of bandwidth those videos take up each month (a dual value metric).
- charging on bandwidth makes sense, because you can tie value directly to the amount of bandwidth. Theoretically, the more bandwidth I use, the more interaction I’m getting with customers and prospects, and the more I’m willing and able to pay Wistia for that interaction.
- Value survey and price sensitivity survey