We hear about the challenges of pricing over and over again when talking to clients. There’s the concern of pricing too high and losing a customer, pricing too low and missing out on valuable revenue, modeling pricing wrong and diluting your customer acquisition strategy. There are a lot of opinions about how to do it right and wrong, but they’re all over the place with few unifying strategies. We don’t want to do that here. In this article we hope to provide you with a framework on how to tactically approach answering the big questions around pricing.
When approaching the challenge of developing a pricing model it’s really helpful to think of pricing as it’s own product. A moving target that must be prodded and tested again and again to see what works and what doesn’t. Determining the “right” price is confusing. Everyone who’s ever built or sold a product knows this. This post has some useful advice and tips to get started based on our 10+ years of sales experience, in addition to links to a few great articles written on the subject.
WHERE TO START?
There are numerous models and strategies that you can use when you’re trying to figure out the right price for your product, so there is no need to reinvent the wheel. When tackling the question of pricing, you have to approach it like you would when developing your sales strategy and models. Following the steps below will put you well on your way to determining the cost and pricing model for your product.
How you price depends on how you want to position yourself in the market. There are several different factors that influence this decision, this includes who your target market is (aka customers), how they think about the problem your product solves, how you position your product in the market (SMB, Mid-Market and Enterprise) and whether your product is truly ready to be sold in your target market.
It’s important to note that early stage startups (pre-Seed and Seed stage) should be aiming to gain traction over maximizing price. This isn’t to say that you shouldn’t be getting as much for your product as you can, but customer acquisition and traction should be your top priority. Here are some basic steps to follow to get your started:
- Step 1: Find your Target Market
- Customers & ROI – Get two to three customers and go deep. You must understand how your customers are using your product and their return on investment (ROI) from using your product. Once you know how a customer is using your product, you’ll be able to figure out the implied value. Does it save them time, money, increase customer satisfaction rates? How does this affect their bottom line? The more valuable they perceive your product to be, the more you’ll be able to charge. Different customers will receive different value so as you approach your go-to-market strategy, it is important to research potential target markets to identify who has the greatest pain and access to budget.
- Pricing based on Company Size – Remember that one price doesn’t fit all. Enterprise software will be a much higher price point than selling to startups or small businesses because they don’t value low-cost products or services. It needs to be worth their time and investment in order to become a viable option. They also have much larger budgets. If you’re selling to this market your product should be priced accordingly.
- Step 2: Identify your Target Internal Contact – It’s imperative that you clearly understand how your internal contacts make decisions. Their level of authority, access to budget, and ability to make decisions will all determine cost and pricing models. What do the decision maker’s value? How much budget do they control? How many people need to be involved in the decision making process? How much did they spend and who made the decisions when buying similar products in the past?
- Different Buyers buy Differently – We realize this sounds like common sense, but you’d be surprised how many companies get this wrong. For example, developers need to try before they buy. Highly technical products need a pilot early on or traction/references to show the product can do what you say it can.
- Step 3: Position Your Pricing in the Market – Figure out where you want to play in the market and position your product accordingly based on your value proposition.
- Established Market – Start by looking at competitors to figure out what pricing model your market is used to. If your target customers are comfortable with particular pricing methods (Freemium, Flywheel, Base, Subscription, etc) it is a good idea to start there. This will help your internal contact understand your pricing because they are already familiar with the model and can easily associate you with it. If you want to differentiate your offering from competitors, pull out the elements of your product that are perceived as higher value for your customers and those that are standard. Offer the standard elements at a lower cost for a competitive price advantage and then sell the higher value elements at a higher price point.
- New Market – If you’re entering into a new market, look at complementary tools. What platforms, apps, or tools are similar to aspects of your product and how are they pricing? What parts of the business do they touch? Are you plugging into a tool or are you a standalone product? If so, price accordingly. Thinking through questions like these will help you determine what your value proposition is in a new market and what customers are paying for similar products to ensure costs fit within market. Check out our last blog post that provides a practical guide on product positioning for more information.
- Step 4: Determine your Acquisition Strategy – It’s important to ensure that whatever pricing model you choose, that it makes sense for your business. Are you priced high enough to cover your customer acquisition costs? Determining which channels your target market uses to learn about new product will help you determine your best strategy for going to market. Do the internal contacts learn about new technology and offerings through conferences, industry publications, word-of-mouth, podcasts, blogs, SEO? Do they read their emails? Are they on Facebook? Where does your target market spend their time? Is your market comfortable with self sign-up or do they need a bit more hand holding? Self sign-up means you’ll have a low cost sales model (although you’ll spend more on marketing), driving a lower cost of customer acquisition. If your customer requires hand holding or has multiple decision makers, you’re going to have a higher cost of customer acquisition meaning a higher price point for your product.You need to make sure you factor this into developing your pricing
- Step 5: Test, Test and Keep Testing. Don’t assume your pricing will stay the same month after month, year after year. Test out different prices with different customers. Not seeing a lot of pushback on price? 2x it. Finding your customer confused by your pricing? Try a fixed rate, per seat, variable price, etc. Get feedback on value and positioning. Talk to advisors. Try listing pricing on your website. Try not listing pricing on your website. Pricing will remain a moving target until you reach your tipping point for your target market. Tipping point means you’ve reached an estimated 16% market adoption of your type product for your target market according to the law of diffusion of innovation. Until that time, test, test and keep testing.
Here are several articles with helpful tips and strategies that we recommend, with a short summary of each. Click title for direct link.
MANAGING PRICING BY MICHAEL DEARINGS
Drawing upon 6 years of running pricing at Ebay, Dearings delves into how product positioning and behavioral economics are a critical component of your pricing strategy.
THE THREE PRICING STRATEGIES BY TOM TUNGUZ
This post explores the strategies relied on by Madhavan Ramanujam, a pricing expert. He argues in Monetizing Innovation that there are only three pricing strategies startups should pursue: Maximization, Penetration and Skimming. They prioritize revenue growth, market share and profit maximization differently and the articles dives into each.
OBSCURE ECONOMIC CONCEPT BEHIND SAAS PRICING CHALLENGES BY TOM TUNGUZ
This post deconstructs the Veblen Supply & Demand curve theory useful for enterprise pricing models and testing.
Tunguz discuss his belief that most effective way to pursue the right pricing is to test constantly and then compare different prices’ effectiveness at maximizing customer lifetime value. He provides a useful equation that plays with how different price points impact revenue.
SCALABLE PRICING: A KEY TOOL FOR SAAS SUCCESS BY DAVID SKOK
This post looks at how to create scalable pricing, a tool that 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.
3 SIMPLE TIPS TO PRICING SAAS PRODUCTS IN THE EARLY DAYS BY MICHAEL CARDAMONE
A few simple tips to help think about pricing early on before you gain the knowledge and confidence around pricing that comes from selling to lots of customers
LESSONS FROM THE TOP 5 SAAS PRICING PAGES BY PATRICK CAMPBELL
Pricing is just a process like everything else. This post contains some great “learn by example” options that really nail the concepts of proper pricing strategy. These SaaS titans succeed through three main axes: 1. clear buyer persona alignment, 2. phenomenal use of scaling value metrics, and 3. being just darn beautiful.