SaaS pricing strategies that use low-value commodity metrics – like storage – to differentiate tiers force customers to make price comparisons that shouldn’t be made.
Updated for 2014
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, 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.
SaaS Pricing and Accidental Anchoring
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/SSAE16 certified… stop!
… it just doesn’t matter.
See, 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, either they won’t step-up to the next SaaS pricing tier (holding back on usage or deleting objects) or they will because they have to, but won’t actually be happy about it since they “know” the insane profit margin you’re getting off of them.
And even though they moved up one tier, 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’re buying a storage service (S3, online backups, etc.), pegging your pricing to a commodity metric like “storage” is simply not aligned with what the customer perceives to be valuable.
And perception is reality.
Worst case, your chosen pricing model takes their minds off of the REAL value you add to their lives and focuses it on some metric that they associate with a super-cheap commodity.
Gaming the System is a Symptom of a Deeper Problem
So as not to simply give high-level advice without any meat to it, here’s a pro tip if you happen to have this type of commodity-based step-up in your pricing:
Go back and analyze the behavior of your subscribers right before they upgraded and look for patterns like excessively deleting objects only to finally upgrade.
While being completely proactive is ideal, you may not be able to do that… one trick is to have your subscription management system trigger a process to go back and look for those odd behaviors after an upgrade and flag the account for follow-up if necessary.
This is important because gaming of the system like that can be an indication that they tried their best NOT to upgrade but finally had to.
And this type of forced, unhappy upgrade should be considered a churn threat; they want out and rest assured, they will eventually get there.
If odd behavior is found, pass that off to an inside sales person or Customer Success Manager 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 SaaS pricing tiers and instead focused on value-added functionality or features as the users grow, so now it’s time to fix the glitch.
I can help…
Let’s Grow Your SaaS Company
For immediate consultation and advice on effective growth strategies and tactics, including help with your SaaS pricing, 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