As any entrepreneur knows, pricing is a critical component of successfully bringing a SaaS product to market. Even after determining your revenue model and pricing strategy, finding the price that customers are willing to pay for can be a challenge. That’s why we spoke with an expert on SaaS pricing, Trustwave Co-Founder, Truss Co-Founder, and HPA Member Andy Bokor.Pricing strategy: the right mix between cost-coverage, profit margin, and customer acquisition. Click To Tweet
At the highest level, Andy’s ideal pricing strategy for your business means “finding the right mix of covering your costs and accounting for meaningful margin while at the same time being attractive enough to get clients in the door.” What exactly does achieving that mix entail?
Understanding how your customers want to pay for it.
As Andy put it, “You can’t price something unless you have a firm understanding of how your customers want to consume it. Sometimes that means not perpetuating the status quo. [Ask] what is the absolute optimal way customers want to pay for it.” This doesn’t necessarily mean making your product cheaper, but thinking through how your customers prefer to pay. This might mean offering monthly pricing over annual pricing or pursuing a payment model that results in the product turning into an operating expense over a capital expense.
Surveying competitor prices and thinking about how your pricing strategy differentiates your company.
Competitor pricing is an important component of determining your own price, since it allows you to figure out what price a customer is willing to pay. Looking at competitor’s pricing allows you to understand how customers value products, as well as to understand the options available in the market. Once you understand your competitor’s prices, you can use them as a guide to determine your own prices. For example, are you selling a premium product that offers real value to customers, or are you offering a basic product differentiated by its low price point, or does your product lie somewhere in between?
Breaking down your cost structures.
“You have to understand your costs so you can understand how you price it. You don’t want to be completely out of line with the market,” stressed Andy. While cost is not the most important factor in determining your price, it must be considered. Your costs set the lower boundary of what you can price your product at, since pricing below cost means you are paying customers to use your product and is therefore not a sustainable strategy. Your costs also help determine the margins you’ll make. Both of these factors are important in bringing your product to market.
Thinking about contracts as you think about cost.
In particular, ask a few core questions:
- How many payments will it take to recover costs?
- Can customers cancel or get out of multi-year contracts?
- If customers can cancel, does it include penalties?
You also want to make sure that, instead of creating multiple types of contracts for different customers based on pricing, you create one contract with an addendum that details pricing. It will be easier for you and your customer to have standard documents, which will be more easily updated if something in the contract needs to change.
Considering structuring multi-year deals.
Depending on your business and the customer you’re targeting, you should think about incentivizing customers to lock in a multi-year deal. You can create incentives through discounts. The trade-off for the discount is reduced sales churn and more opportunities to sell to new customers.The discount trade-off is reduced sales churn and more opportunities to sell to new customers. Click To Tweet
Laying out price point choices.
Customers like pricing options. In a 3-or 4-tiered model, you give your customers a range of pricing options. This allows you to entice customers with a low price but then introduce them to a more robust model option that may be better suited to their needs. It’s easier to upgrade an existing customer than to obtain a new one, and as Andy explains, “a comparison matrix usually drives customers to a higher price point because [you entice them] into picking a more full-featured option.” Still, he warns that when you’re considering a model like this, you need to relate back to your competitive analysis.
Specifically, set goals for your gross margin determine when discounts make sense for you, and hand goals down to sales representatives to execute. These decisions are important for how you’ll implement your chosen price. Setting a goal for your profit margins involves realistically looking not just at the price you set, but also at the discounts you might need to provide in order to get clients. When setting pricing, ensure there is room to negotiate and to allow for unforeseen circumstance, like competitive situations. Sales representatives are then able to offer discounts to attract key clients with approval from management. This allows you to establish street values for your product without losing out on deals.
Sound interesting? Stay tuned for a simple Excel pricing model in a future blog post.