SaaS Pricing Strategy: The 10x Rule

Screen Shot 2015-02-14 at 6.04.56 PMFirst thing to clearly understand when developing your SaaS pricing strategy; pricing is a function of Marketing.

If you think creating your SaaS pricing strategy is a function of Finance, Accounting, Operations, or even Sales… you’re doing it wrong.

That means anyone who comes up with a price for their app (or for your app) as the result of a spreadsheet function is doing it wrong.

The spreadsheet shouldn’t tell you what your price is… your price should be something you put into the spreadsheet that will determine revenue and allow you to calculate future growth, profitability, etc.

Price should be an input, not a result, on a spreadsheet.

Second thing to clearly understand:

No one knows what the best price for your SaaS offering should be.

This is why most ‘Pricing experts‘ like to deal with companies that sell commodity products – including traditional software – in markets driven (downward) by pricing.

Value Pricing a SaaS offering, on the other hand, is a completely different beast where you’re often dealing with a completely new and/or heavily differentiated value proposition and very often – with entirely new categories of service offerings!

All we can do is get it AS RIGHT AS POSSIBLE out of the gate and understand that pricing is not a “set it and forget it” function, but – just as your overall Marketing Strategy is ever-evolving and changing with market forces, market feedback, etc.

Now there are techniques, tricks, voodoo dances, and smoke-n-mirror performances one can employ while coming up with your initial price that can help you get closer to that ‘getting it as right as possible.’

SaaS Pricing Strategy: Consider the Customer First

But let me be very clear; any techniques/strategies that don’t take the CUSTOMER into consideration as the main input when developing a price is not going to get you close to where you need to be.

There are so many ways to mess up pricing that the chances of you getting it close to right are not in your favor, even if you employ many of the tricks of the trade.

Fortunately, I don’t employ many of the tricks of the trade… I think ‘the trade’ gets most things wrong so why would I employ their tricks?

But I want to help you get your pricing as right as possible so you don’t leave money on the table… or not too much, at first.

Lead with Value for a profitable SaaS Pricing Strategy

Look, it’s easy to sell cheap stuff… higher prices actually require you to know your customer better!

Remember that customers generally care ONLY about their Desired Outcome and how it affects them (at least when they are searching for a solution).

This means – at first – don’t emphasize features; emphasize OUTCOMES. RESULTS. SUCCESS.

So the definition of Value Pricing is: Applying a price to a service that is congruent with the value derived from the service rather than the underlying cost to create and deliver the SaaS, market prices, specific margins, etc.

Which makes Value Pricing the most effective method of pricing for SaaS and Web Apps… something like cost+margin just doesn’t make sense.

The key to Value Pricing is knowing the, well, value of your service as perceived by your target market AND/OR market segments (not all are alike).

Value is the “What’s In it For Them?” – WIIFT – of your SaaS.

It is the benefit of the benefit of the features… or the emotional benefit. It’s their Desired Outcome.

So a very good way to determine your price – because it requires you to really understand the customer – is to follow the 10x Rule.

We charge this much because our customers get at least 10x that much value.

If I sell something for $100, I want to provide at least $1,000 in value to them… at least.

Even better is if the “value” isn’t something that is ‘ROI-able,’ but rather something intangible that they cannot directly quantify.

You do this by understanding your customer’s Desired Outcome, goals, opportunities, problems, etc.

You do this by offering Price Anchors that are not competitive services, but what it would take to replicate this in-house, with low-efficiency, high-cost human beings, what you (or the industry) has paid to create this solution, or the fear of not meeting some level of compliance and the costs associated with that.

And you can remind them – maybe not in so many words – that you must charge a premium price so you have a large enough margin to provide an extraordinary value & experience!

But don’t just remind THEM of that… remember that yourself… charge a premium so you can offer truly PREMIUM service!

Using this method to determine a price will become clear quickly, and you’ll see that delivering a 10x ROI – even if simply perceived by the customer – is rather easy.

In fact, once you start doing this, you’ll see how it can be true that if you charge too little, a 10x ROI isn’t that exciting and how a low price could actually reduce your credibility in the market.

About Lincoln Murphy

I am leading the Growth practice at Winning by Design™. If you need help growing your SaaS, request at least a 15-minute call with me via Clarity. Be sure to join my mailing list - I send awesome stuff to the list every week or so. Also, connect with me on LinkedIn or follow me on Twitter.

Comments

  1. Great post Lincoln!

    Here is an excerpt from above that would make a great tweet:

    Look, it’s easy to sell cheap stuff… higher prices actually require you to know your customer better!

    Agree 100% . . . all the best,

    Chris

  2. Great article Lincoln. My company is in a very new and attractive health and wellness technology market segment with very little noteworthy competitors. But, we have been horrible at pricing and positioning our suite of software products and services for the greatest value in our clients environments. Your article made a lot of sense and I am grateful.

    – Hooman Fakki

  3. I believe this blog should be translated into Japanese, so much valuable stuffs here.

  4. Very nice and timely blog (for me) as we are trying to figure out a good-enough pricing model. I am curious to understand more about your POV regarding …

    “Even better is if the “value” isn’t something that is ‘ROI-able,’ but rather something intangible that they cannot directly quantify.”

    because it has been fairly easy for me to tie our pricing to MEASURABLE ROI and get customer buy-in. I am sure that we are leaving money on the table at this stage. But, our goal at the MVP stage is to prove market acceptance and revenue generation potential. So, should I really worry too much about ‘optimal’ pricing based on non-ROI factors that may be harder to communicate, etc.?

    I will email you with specific details to take up your offer 🙂

    • I said it was even better to provide value that you can’t easily quantify – but to qualify is easy – because it allows you to charge a premium for premium sake. Uber vs. a taxi (or UberX).

      Both get you from point A to point B but there’s an intangible – luxury- attached to an Uber Black, SUV, or LUX ride… but no measurable ROI.

      As you launch your MVP and are in-market, continue to talk to customers and you’ll start to understand what makes them tick… what those intangibles might be that you can start to refine your Value Prop around.

      Don’t over think it at first… get it as right as you can, get to market, learn, iterate, and continue to grow.

      Best of luck!

  5. Jo Kerekes says:

    Dear Lincoln,
    Why exactly 10x ROI? Why not 5x or 20x? Can you elaborate on this a little? Can you support 10x ROI by a research/paper?
    Thanks,
    Jo

Trackbacks

  1. […] folks at Sixteen Ventures, authorities on SaaS strategy, have a model called the 10x Rule. Use it in your = SaaS pricing strategy and, they claim, you’ll make your customer happy […]

  2. […] folks at Sixteen Ventures, authorities on SaaS strategy, have a model called the 10x Rule. Use it in your = SaaS pricing strategy and, they claim, you’ll make your customer happy […]

  3. […] folks at Sixteen Ventures, authorities on SaaS strategy, have a model called the 10x Rule. Use it in your = SaaS pricing strategy and, they claim, you’ll make your customer happy […]

  4. […] folks at Sixteen Ventures, authorities on SaaS strategy, have a model called the 10x Rule. Use it in your = SaaS pricing strategy and, they claim, you’ll make your customer happy […]

  5. […] folks at Sixteen Ventures, authorities on SaaS strategy, have a model called the 10x Rule. Use it in your = SaaS pricing strategy and, they claim, you’ll make your customer happy […]

  6. […] SaaS Pricing Strategy: The 10x Rule – SaaS Growth Strategies – When developing or optimizing your SaaS pricing strategy, remember the 10x rule; you’ll make your customer happy and your company a lot of profit. […]

  7. […] SaaS Pricing Strategy: The 10x Rule – SaaS Growth Strategies – When developing or optimizing your SaaS pricing strategy, remember the 10x rule; you’ll make your customer happy and your company a lot of profit. […]

  8. […] Lincoln Murphy of Sixteen Ventures calls this “value pricing,” and he defines it like this: […]

  9. […] Lincoln Murphy of Sixteen Ventures calls this “value pricing,” and he defines it like this: […]

  10. […] Lincoln Murphy of Sixteen Ventures calls this “value pricing,” and he defines it like this: […]

  11. […] 10 minutes – Get to know their business (aka look for opportunities where can provide their business 10X value). In most cases the prospect may already know of a way your product can […]

  12. […] had someone reach out to me on Clarity recently and say “it was when you said in this post that no one knows what your startup pricing should be that I trusted […]

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