SaaS pricing strategies that focus on commodity metrics – like storage – to differentiate tiers lead to incorrect price comparisons.
This topic came up with a client who wanted to pass on the storage costs associated with the use of the system to their end-customer.
We quickly moved past that idea, but I wanted to bring it up to a greater audience so I decided to finish and share a post that I’ve had queued up for a while. Your feedback is welcome, of course.
A quick search on Google shows you can buy a 500GB hard drive for $60, or about $0.12 per GB. Anyone can do that search and probably a lot of people have; most probably weren’t happy when they did, either. Even if they haven’t actively sought pricing on a new hard drive, they know that a GB is super cheap these days.
Yet when you sat down to develop your pricing strategy for your SaaS or web service, and the pricing page to go along with it, you decided it was a good idea to charge your customers an extra $20/month or $240/year for an extra GB of storage space; something both you and they know they can get for $0.12.
Wait! ”That argument doesn’t make sense” you say. “We add value on top of the storage;” you manage that data for them, you do backups and have a disaster recovery plan, your data center is SAS70 certified… stop… it doesn’t matter any more.
Whether you like it or not, your customer just did an apples to apples ROI comparison between two things that have absolutely nothing to do with each other; your complex web service and a commodity, desktop hard drive. And its all your fault!
So now, they either won’t step-up to the next tier (holding back on usage or deleting objects) or they will because they have to but won’t be happy about especially since they “know” the insane profit margin you’re getting off of them. More importantly is that even though they moved up, they might be actively looking for a way out.
You see, knowing that you add value isn’t enough; you need to tell the customer about the value you add and sell them on it. Unless they are buying a storage system (S3, online backups, etc.), at best focusing on “storage” is simply not aligned with the customer. At worst, it takes their minds off of the true value you add and focuses it on some metric that they associate with a super-cheap commodity.
So as not to simply give high-level advice without any meat to it, here’s a free tip if you happen to have this type of commodity-based step-up in your pricing. Setup monitoring for odd behavior before your user upgrades such as excessively deleting objects only to finally upgrade.
This can be an indication that they tried their best not to upgrade but finally had to. This type of forced, unhappy upgrade is a good indicator of impending churn; they want out and rest assured, they will eventually get there.
Depending upon how you’ve built your system this might be possible only after they’ve upgraded. Have your subscription management system trigger a process to go back and look for odd behavior after an upgrade. If some is found, pass that off to an inside sales person or account rep who can talk to the customer to make sure they are happy and if not, hopefully fix it and get them to stay around longer.
That tip aside, the entire mess could have been avoided if you didn’t put some type of “commodity item” as a main differentiator between pricing tiers and instead focused on value-added functionality or features as the users grow.
Now, if you’ve been in-market at least 6 months and are curious how we could Accelerate your Profitable Growth – perhaps by optimizing your Pricing Strategy – contact me and we’ll setup a time to discuss your options for improving and accelerating customer acquisition and profitability.