SaaS Pricing Model: Value Metrics Are Key

Your SaaS Pricing Model should be built around what the customer values, which probably means staying away from “commodity” metrics like storage.

I find most articles about “SaaS Pricing Model” to be less-than-helpful because they almost always fail to take into consideration the WIIFT of the customer – the What’s In It For Them.

Most articles usually talk about connecting pricing with the sales model rather than the value perception of the market – a potentially costly mistake. People who try to correlate specific price to distribution methods / sales models with few or no other inputs are making a big mistake.

Your SaaS Pricing Model Starts with the Customer

Price is always tied to the market’s willingness to pay, at all levels, commodity or luxury. Nobody cares what sales model you need to support internally, nobody cares what your costs are, all they care about is what is in it for them. In case you haven’t figure it out yet, this is what you should care about, too.

For SaaS, Web Apps or other information services with mostly front-loaded manufacturing costs, price is tied more than anything to how you market and position your product/service, since that will dictate value perception and willingness to pay.

This is in contrast to physical goods where supply and demand can affect the price or where manufacturing & distribution add significant cost to each order. I’m talking about SaaS here, not truck tires.

The key to pricing is simple: the better you understand your market the easier it will be to create an offering that they perceive to be high value, meaning more revenue and profit for you.

But understanding your market is hard, it takes work, effort, some thought, etc. So you might as well just pull a number out of thin air (or somewhere else), multiply x 3 (as they say, its easier to lower, than raise prices), and hope for the best, right? You’ll need a strong table to hold all that money you’re leaving on it!

The fact is, the price , or price ranges, for tiers / bundles is not often the issue when our clients come to us; well, not the first issue. For many, it is the pricing metrics that are used that is the real issue and once that problem is fixed, it usually renders the first problem irrelevant. Pricing metrics are those little things we base our prices on – and ultimately our entire business – all of us, even us consultant types.

The de facto standard pricing metric in SaaS is per user, per month. As the markets and vendors mature, this is changing and could be anything from packages shipped to number of transactions completed. These are the real keys to value pricing in SaaS and are not talked about as often; either because people don’t really understand this aspect of pricing or because it is too difficult; maybe both.

Unfortunately we see and hear from companies all the time that have built systems or leveraged metering/billing systems that are tied specifically to per user, per month or other legacy metrics. In SaaS, pricing is marketing, but it is also tightly coupled to the underlying technology.

You know that truck tire I mentioned earlier? You can change the price, the price metric, distribution for that truck tire – and legacy software – all day long and the tire (or software) stays the same.

With SaaS, not so much. Be careful that you listen to people that don’t just understand pricing, but the SaaS Business Architecture, too.

SaaS Pricing Model: WIIFT?

So, work with me here. If pricing is marketing, and pricing is where value perception (the market’s idea of WIIFT) and value proposition (what you think the WIIFT is) intersect, then the pricing metric is what ties all of that together. If you were to boil down the value perception to one element, it would be the pricing metrics. And yet few ever speak of these outside of pointing out what the typical metrics are.

Why is this so important? This is really a very large topic, but the idea is simple; if you base your pricing on something people find no value in, your value proposition will not be aligned with their value perception. If people don’t care about the number of users, for example, if you charge per-user you could run into the “shelfware perception.”

The idea behind shelfware comes from the old days when software came on a disk and in a box that you could actually put on your self. The saying comes from the fact that you bought too many copies of a piece of software and rather than using productively, it was “installed” on the shelf in the managers office.

So, if you have a situation where two users – Meg and Brian – are paying for the “lite” version (a bad name and a topic for another day) and want to add Glenn to the system, but to do so requires that they upgrade to the “pro” version which includes up to 10 users, they’ll be paying for 7 users that they don’t need – Shelfware 2.0? So, what’s the problem? Don’t we always want people at the low-end of the next tier up? Aren’t they the most profitable customers? Yes, but we need them to want to be there.

The idea in B2B SaaS that seems to apply almost across the board (your mileage may vary so please do your homework), is that scaling pricing based on the complexity of the companies that are using your product/service is a good idea. This ensures that your price is tied to value perceived at every tier. Which is why I hate this quote by Paul Graham: “You’ve found market price when buyers complain but still pay.” I don’t care who said it, its wrong.

That quote simply flies in the face of “value pricing,” customer-centricity, marketing, etc. and can hurt your Customer Lifetime Value (LTV). Complaining customers aren’t happy and it is hard to upgrade, up-sell, or cross-sell unhappy customers. If they are not happy, as soon as they find a suitable substitute, they will leave. And in the meantime, they’ll game the system, sharing users and logins, or they’ll stop using the system as much.

It is true, you can’t please everyone so some might complain about pricing, which is fine. At some level people will complain that they have to pay anything – this is especially true when you’ve been giving it away for free at first. You have to be able to figure out if the complaining is because of that, or if it is real push-back.

The better you understand your market, the easier that distinction will be to make. The goal should be to get those who do pay to do so happily so that we can get more money from them over their lifetime as a customer. Ideally, you’ve done the work necessary to focus your offering to those that will perceive value removing complainers from the equation.

But there is another aspect of pricing metrics besides keeping Shelfware perceptions at bay; its about aligning with value perceptions to grow LTV. As I’ve said a number of times before, one of the problems with Freemium – for example – is that people promote the free version over the premium versions, ensuring that all customers will go through being a user first; which is why conversions are so low and time to profitable revenue so long.

If they would promote the paid version from day one, give incentives to sign-up for the premium version, etc. they would get the money from their customers faster, meaning that an increased LTV. The same principal holds true in value pricing for SaaS vendors.

The SaaS Pricing Page is a perfect jumping off point for most discussions of pricing with SaaS vendors because it is generally where they start anyway. SaaS & Web App vendors who have opted for price transparency will quite often sit down to develop their pricing strategy by laying out a pricing page first.

Who cares if this is the right way to do it, it is the way its done. So we use the pricing page as the visual manifestation of a SaaS vendor’s pricing strategy and start from there. So when you lay out your pricing tiers or bundles, there is a good chance there will be three versions – small, medium, and large – and that it will be based on number of users. You need to ask yourself if that is the right metric.

Not only could “users” be a metric that has no value to the market, but by basing pricing on that metric, you’ve basically told your customers to start small, then move to medium, and then to large.

Have you provided any incentive – other than number of users – for someone to start with the large bundle out of the gate? What if they only have 3 users (rather than the 25+ in the large bundle) but would find value in some of the features of that bundle? Do they even know they could find value in those features or were you too busy pushing the fact that they the large bundle has 25+ users and 10GB storage?

Look, your pricing today affects the overall LTV – don’t worry about too high or too low – worry about aligning with value as the customer grows/changes. This is what I mean when I say once we figure out the right metrics, what you originally had price-wise is probably irrelevant.

When we figure out the right way to charge based on value-oriented metrics, the price might go up significantly. Or it might not, but the migration to higher-priced tiers early on means a greater LTV, more profit, and a business that is worth more in acquisition or IPO. Yeah, IPO – this stuff doesn’t just apply to startups and small Web App companies – this is a lesson for all SaaS companies of any size.

Let’s Fix Your SaaS Pricing Model

For immediate consultation and advice on effective growth strategies and tactics for your SaaS company, schedule a 60-minute meeting with me via Clarity. If you feel a more involved engagement is required for me to help you, email me with the specifics of your situation (as much detail as you’re comfortable giving) and we’ll setup a meeting to work through the particulars.

– Lincoln

About Lincoln Murphy

I invented Customer Success. I focus primarily on Customer Engagement. Learn more about me here.