082: SaaS Pricing
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Today we are going to talk about SaaS pricing. This is a popular topic, and we get a lot of requests to talk about pricing. Hiten was adding up his pricing related emails, and he gets about 12 a day in one form or another. One pricing related thing we do is read the Price Intelligently blog. Their free resources alone should be enough to get you started. The Bare Metrics blog and other pricing metric sites also have great content.
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The one fundamental pricing topic people forget is that the main purpose of having pricing is to make it easy for customers to buy your service. Even with a complex pricing model, you want to reduce the amount of friction for a purchase. If people are paying per page view on your product, it’s not a good idea to switch to per seat pricing.
- Creating a pricing framework that makes it easy to buy, cheapest is not always best
- How to quantify if a new SaaS product is too expensive
- Product and pricing questions to ask during customer development
- Creating more value with a new product can be better than price adjustments
- A pricing framework is about marketing a positioning and the target customer
- Focus on what will help your business grow and segmentation
- Getting the facts and data can help find the right business direction
- Finding your authentic competitive advantage
Links and Resources:
Freemium in SaaS Podcast Episode 003
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Steli: Hello, everyone. This is Steli Efti.
Hiten: And Hiten Shah.
Steli: And in today’s episode of The Startup Chat, we’re going to talk about SaaS pricing. So this has been a very – a requested episode. This is something a lot of people want us to talk about. There’s a lot of great resources out there that already talk about pricing, but I know that we have a lot of thoughts on this and people want to hear us talk about this topic. So let’s chat about that. What’s your overall framework when it comes to figuring out pricing? Let’s start from a new SaaS app perspective.
We can talk later about changing pricing if you feel like you haven’t gotten it right, because that’s a challenge in itself and in interesting one. But you build the SaaS product and you’re trying to figure out what should be the price that I set for this? What’s the framework that you use, what are mistakes that people make; what’s the way that you think about this?
Hiten: I just looked through my email, and I get about two or three emails a day from people, whether it’s internal team, external about – with the word pricing in it. And this is not sales; this is literally questions on pricing or pricing updates or something; like something in there. And then if you count all the other ones, you’re talking about about a dozen emails a day with pricing in it. So at least five, six tactical and the rest are just like, we had pricing changes or whatever. So it’s super interesting of how popular of a topic this is.
I think in my opinion on pricing, the core of it starts with – there’s a lot of resources out there on pricing. There’s the Price Intelligently blog, which is the one that has branded themselves and that company, they’re friends of mine. I like them. They’ve helped me with pricing and helped a lot of SaaS companies with the pricing. So I say read their blog. Literally, you can read their blog if you don’t have the money to pay them, and get 90 percent of what you need in terms of learning how to do it and having probably a better shot than I ever did of doing pricing whenever I had to do it without their blog.
So all of our team reads it when we’re working on this stuff. It’s not even an endorsement; it’s like that’s the source right now. There’s a bunch of other blogs, Bare Metrics Blog and a bunch of others that are helping you monitor your pricing and stuff, so some of those have great content on pricing. Although, I’d say that Price Intelligent has the most experience with SaaS pricing.
So I do that first. But outside of that, I think there’s one fundamental thing that I see a lot of people forget. There’s things like value based pricing, feature based pricing, and all this chopping up. But fundamentally, the reason you have pricing is so that you’re reducing the amount of friction it takes for someone to buy from you, and your pricing has to do that. That doesn’t mean your pricing is simple. That doesn’t mean anything except that you’re trying to make it easy to buy. And I always come back to that every time I think about the pricing, even on complex pricing.
Because sometimes, complex pricing makes a lot of sense. Because the way you’re getting people to pay is through a freemium product. So you might want to find all the different ways they can pay, and that might require a lot of complexity. Or you might be trying to do a lot of things with your product into different departments, different teams, different people want to pay a different way. Because you’re trying to reduce the amount of friction it takes for someone to buy. That’s like the core of pricing.
For example, if people are paying for your product on a per page view process, it’s probably not the best idea to charge them per seat. And this is just personal experience. But in an analytics company – there’s a lot of analytics companies. A lot of them try to add per seat pricing into their model, but then they go back to per session, per paid view, per visit, per event or something like that. Because seats don’t matter in analytics because not everyone in the company is typically using an analytics tool.
Steli: Yes. And also –
Hiten: So that’s just an example all the way through.
Steli: But that’s also because the value that your product creates for them is increasing by the size of data that they have to look at. So it makes sense for you to charge more in that level because you create a lot more value.
Hiten: Well, they’re just used to paying for it like that.
Steli: That’s another thing; they’re just used to it, as well.
Hiten: I totally think your point is valid, but they’re just used to paying it. I think that’s the biggest pull you have towards pricing is how they want to pay for it. And that’s the lens I don’t see enough conversation about.
Steli: So if I wanted to challenge you on this, I’m pretty certain I know what the response is but I’ll do it anyway because I think this is a valid thought at least. If at the core of pricing is the question how do I make it as easy as possible to buy, zero is the right price for everything. Because wouldn’t that make it the easiest for everybody to buy? I know the answer’s not yes.
Hiten: So they’re not buying. At zero, they’re not buying.
Steli: At zero they’re not buying.
Hiten: They’re not buying; they’re using. They’re users.
Steli: Okay. Fair enough.
Hiten: Like literally, they’re not a customer, like in technical terms.
Steli: Technical terms, that’s true. But let’s say, then, a dollar, a cent, whatever the cheapest in sale, in cheapest thing that you can think of.
Hiten: You got them. You got them to pull out their credit card and now it’s your job to get them to pay you more if you can add more value to their lives.
Steli: By the way, I don’t think that that’s even true because I think that for certain products, like in the enterprise world, very, very cheap could make them not want to buy.
Hiten: No, they don’t buy. Yeah. And what I’m saying respects that. And it’s reducing friction. So if enterprise says I want to pay you more for X, Y and Z and you say no, you’re increasing the friction it takes for them to buy. And enterprise is way typical of this. Because historically, enterprise products have been built by this process. They hear it in sales; they build it in product and engineering, or R&D if you want to call it that. They hear it in sales, and then they build it. And then sales sells it. And then they build it, and then sales sells it. It just is back and forth.
And so in that case, yeah, they’re just reducing the friction to purchase, even in enterprise.
Steli: So here’s a framework that I’ve used a lot of times with people on the pricing side, and I’m curious to hear how you think about this. Because from a sales perspective, what I see a lot of B2B SaaS companies go through is they are trying to set a price that will reduce any type of friction where somebody could bring up price as a reason not to buy, which very much aligns with the philosophy that you’ve said.
Hiten: Yeah, it’s the other side of it.
Steli: Yes. But at the same time, I truly believe that if 100 percent of your customers are saying pricing was never even a topic, you’re charging too little. I feel like you’re at kind of the right equilibrium of things –
Hiten: When some people say no.
Steli: When some people say this is cheap, some people say this is too expensive, and most people feel like this is the right price for the value I’m getting. So you’re not trying to optimize to get everybody to say this is so inexpensive, I don’t even think about it.
Hiten: But again, there’s all kinds of alternatives to that. Let me give you an example. If too many people are saying no, how do you know there’s too many people saying no? I’ve never heard a good answer to this. How do you know that too many people are saying no, or too little people are saying no, or too many people are saying it’s too cheap? It’s very hard to quantify this because most people don’t have enough data. They don’t have enough nos. They don’t even log the nos in that.
Steli: Most founders of a new SaaS only need one prospect to say this is too expensive to instantly change their pricing.
Hiten: So that’s the worry at early stage. That’s the problem. So you’re saying just because the first person says no, doesn’t mean your pricing is wrong?
Steli: Yes. It doesn’t mean your pricing is wrong. Doesn’t mean this is the right buyer. So you need to hear a bunch of people tell you this is too expensive. You need to hear a mix of things to know where you are in the spectrum of the market.
Hiten: Okay. So this is earlier pricing, if you’re just sort of offering it and you’re doing it through sales calls or inbound or whatever, right?
Steli: Customer development. You talk to people, they ask you what would it cost, you say and they go, that’s too expensive. People, because of insecurities, instantly typically go, let’s set the price so low that nobody would ever tell me this is too expensive.
Hiten: This super relates to something that really bugged me. Which is whether you’re doing it through sales or the way you’re saying, it’s like just go figure out what they’re paying for it today. If you just did that, the way you think about how to charge and the price you first lay out will probably hit the right mix if you just figure out what they’re paying for it, how they’re paying for those things. Whether they’re competitive to your product or not, someone’s a buyer. What else does that buyer pay for, and how much?
I start asking that in customer development. I’d love to know what you’re paying for today. What plan are you on? Even if it’s not competitive; what are you paying for it? You in your role, what do you pay for that you’re responsible for? If you’re talking to a buyer, that’s great. If your talking to a user, you ask: what do you use? Do you know what plan you’re on? What functionality does it have? Even if it’s not related to what I’m trying to sell them or what I’m building. Because then I have guidance. And I can say: I know this is not related, but it’s cheaper than Kissmetrics. I know that’s not related, but you’re already paying that much. Look at the value they deliver for you.
What I’m saying is I’m going to charge you less and I think we can deliver even more value than a tool like that. And you’re not even competing with Kissmetrics but you’re just saying you have a frame of reference to help you think through what the pricing should be and a way to communicate with them. And this might be a sales tactic, this might be customer development; I don’t know. But I like to go find out what they’re paying for, especially in a market when I don’t know what to charge.
Steli: The other thing is – this also is kind of early days related, but a lot of other companies in the early days in SaaS, they create a pricing, they get a few early customers. And then because the product is so early and it doesn’t do everything that people want, it’s missing some maybe core functionality. When early customers churn, then, and say this didn’t deliver as much value, this needed these other things that’s not there, yet and I need more powerful features – so idea creations or whatever that is – the natural instinct is instead of saying this is an uncomfortable spot for us to be in as a SaaS company, but the way to fix this is create more value and make the product all it can be. Versus let us adjust pricing, which is the wrong tactic to solve this pricing.
Hiten: Do you think people are just not asking why they wouldn’t pay? Because if someone tells me they don’t want to pay that price, I’d be like, why not? And then I would be like, what would get you to pay the price; what do we need to do? Because if you get enough data on that, you can probably triangulate.
Steli: It is asking why, but it’s also realizing that in a negotiation, the information that you get is not always authentic and true. And a lot of buyers will mindlessly feel like they need to demand something close to zero because that seems to be the best outcome for them. Although, they don’t realize they pay a lot of –
Hiten: Nothing is zero.
Steli: Nothing is zero and they pay all this money for all these other things. But if you just casually ask them for their opinion, they’ll go, zero is what I want. But then they go and they spend all this money somewhere else. So it’s also the experience of just not taking people on their word, understanding that when you go out to sell somebody on your solution, the goal is not – there’s transaction sales. Like when I go to a bakery and I go, I want this loaf of bread and the salesperson says: $2.00, please. That was a sale. But that person had to do nothing, right? It was totally transactional.
Versus me going and saying this is a $20 million enterprise solution we’ll integrate at IBM. That’s going to need some back and forth and people will not just say yes to everything. In our experience –
Hiten: It’s a process.
Steli: It’s a process. So you’re not trying to avoid any kind of resistance; you’re just trying to avoid the wrong resistance and you try to understand what they’re truly resisting and what they’re not. But going away from that, in your case what you’re saying is go and look – how are people buying today and what are they paying for; what’s the framework they’re used to.
Steli: So let’s say there’s a range of frameworks. The advice here probably would be who’s your customer? Is it the enterprise, the SMD, the professional, the end consumer? But let’s say even in a specific segment, let’s say you do the Persuma, an app that professionals use. You say even in that world, there’s ten other companies or products that have a wide variety of pricing. There’s some more freemium product. How do I choose how to charge it? Am I always going to try to be the cheapest on? Am in trying to be the most expensive? Do I try to be just in the middle? Who is the more popular app? Let’s be their pricing, let’s be a little cheaper than them. How do you decide?
Because part of pricing is also marketing and positioning and kind of how people will perceive your product. It’s nowhere more prevalent than in the end consumer world where you can buy a car and it can widely range in pricing, depending on the perceived value that the people associate with that. So how do you think about it when there’s multiple options?
Hiten: I think cars are a great analogy. And I think it’s like you and me – Toyota? You want a Toyota? You want to buy a Toyota? You want to buy a Honda? You want to buy a Lexus? You want to buy a BMW? You want to buy Audi? You want to buy a Ford? You want to buy a Chevy? So to me, it’s like there’s a lot of variety out there. And if you take that analogy and look at your competitive landscape and just look at how people are pricing, because that’s essentially what you’re talking about, right? There’s low, medium and high.
Everyone is – if the business has been running long enough, say a year or more – maybe two – you could only imply that they tried at least a few things, and something might be working. I’m just making some assumptions, but it’s probably true. And so then I would just look at they’re priced like this, they target Y. They’re priced like this, they target X. They’re priced like this, they target Z and then be like, where do we want to fit in? Or do we not want to fit in and have a whole different approach? But I don’t think there’s a high price, low price, medium option way to think about it. I think it’s more like where’s our entry point. And that has a lot to do with the value you’re adding.
Because if there’s someone who’s targeting enterprise, it’s likely you cannot today, from the get-go, at the same value they do. So you’re either selling something small to that customer because they’ll accept it; enterprise usually doesn’t. Or you’re selling to somebody who the other company that’s targeting enterprise doesn’t worry about, which is a lower end customer. But then you might have other competitors on to escape. So I think it’s just a process of narrowing. It’s like we have a certain feature set. If there’s already a market that exists, we can look at those products and say where’s our feature set align with how those product feature sets are?
Because that will already be instantly in the customer’s head, or can be, when they come to us and want to buy from us. So then it’s about being competitive enough, or being so different that you can provide something those other folks can’t.
Steli: Let’s switch gears. So we talked a little bit about early day pricing and how to think about it, and a great resource to learn more about it. Let’s talk about folks out there that have a SaaS product, that had a pricing for awhile. And for one reason or – how do they know that it’s not working if they are thinking about changing it? Because a lot of people are thinking about changing their pricing, and then they struggle through deciding if pricing is truly the problem; if so how to change it, and then how to go through the transition.
Hiten: I’m just going to start but this is like such a daunting thing, and it’s such a simple answer. It just literally boils down to what’s going to make your business work? The best answer is data. So there’s an economic equation in your business, whether you know it or not. A certain amount of people come, certain people go through a bunch of steps, there’s a conversion rate and there’s a revenue at the end. And so if you just think about it like my business is that, and then being able to determine all these different – whether it’s configurations, or things like should I target small business or large enterprise? I already have running data.
I should already be able to tell who my customers are. So then you do simple things like segmentation, like by company size. Is there a churn rate that’s lower or higher? What’s going to make my business grow? That’s the fundamental question. You need to know your equation. And then you need to have segmentation. And that segmentation helps you determine where you go focus your efforts. And probably very data oriented on it first, but if you have a running business you have data. Let’s use that data. That’s like my answer. Because it’s all different. I’ve seen all different things. I was talking to an entrepreneur today. He targets SMBs, he’s had a business for a while, it’s all self service and he just started sales a few months ago.
And he’s like: I want to go do all of that. I’m like: yeah, it sounds good. And he’s like: I thought you’d say we shouldn’t do that. I’m like: no, contextually, you’ve provided information about your business to me and yourself and your team that the direction you’re thinking is right. So why would I argue with that just because I love premium? No, this is right. It makes sense. And to me, it’s very contextual.
Steli: So how do you manage the change? Because I think that’s something that people – prevents people from going through it because they are afraid about their customers, the existing customers. They’re afraid about the unknown or what’s going to happen in the future. They’re afraid of the employees. Some people on the team don’t agree with this pricing. It’s change, right?
Hiten: So there’s a lot of tactics in keeping customers happy. So I’m going to save those for the blogs I write about them, because you know there’s a ton; I’m sure you’ve dealt with it. But I think the bigger thing is your internal team. But again, if you lead with data, they’re not going to think you’re making it up, because you’re not. You’re like: look, we looked at this. Here’s what the data says and we’ve got to decide. Or sorry. Here’s the data. Now we’ve got to decide what we want to do based on that, which are two different things.
Steli: I like it. But I also think that data is not always – many times data is not fully conclusive, short of some bias or subjectivity.
Hiten: Yeah, like what’s the traffic area that’s coming in.
Steli: So I can look at the data and go, this tells us we should do X, Y and Z, and then somebody else looks at them and says I don’t agree with that.
Hiten: Yeah. So that’s not what I’m saying. What I’m saying is data are facts, so let’s just get the facts. Let’s not talk about what we’re going to do with it. Let’s get the facts. Then we can either get in a room and debate the facts if we need to, first. But usually, nobody debates facts if you say they’re facts and you prove it. And then you talk about what do we do with this information.
Steli: Yeah, what’s the interpretation?
Hiten: I have an intuition. Here’s what I think. It’s an alignment meeting because you have data. The best alignment meetings are when you have data. It’s not that the data tells you what to do. You still have to decide. And yeah, you can debate it but the data is truth, if it’s truthful data and if it’s data about a customer base. So if you actually already have customers, I would just go – literally – get that data, do the right segmentation, debate the segmentation. Get the data, then have a meeting that’s about alignment and figuring out what we all should do together about this.
For example, I’ve seen companies who have high small business churn that actually have fixed that and now have very low small business churn. I’ve seen a company in the same space that has high small business churn that didn’t want to fix it, and wanted to move up market because they already tasted it. And so then they figured out how to do that. They’re working, too. So it’s more of just looking at the data and knowing what your capabilities are on the team, and where the alignment is and then going.
Because a lot of times, the answer of where do you hit the market isn’t a binary one. That’s why there are so many competitors in all these markets targeting all different segments. So it’s just about sort of breathing, almost. Like, this is okay; we just need to use some data and then we can talk about it and then alignment comes. Because everyone gets stuck on how are we going to make the change, instead of what’s the change we want to make.
Steli: I love it. Also, the other nugget that I really like is – and we’ve talked about this – with authenticity; your authentic competitive advantage. And in this case, it’s not what is the right price for everybody, but it’s what is the pricing that fits the customer we want to serve, and the team and company that we are; like the people we are.
Hiten: Which is the business we want to build, right, between those two things?
Steli: The business we want to build, yes.
Hiten: I love that.
Steli: And asking that question can clarify a lot of things. Because if you don’t ask that question, it’s a much more challenging question to ask. What’s the right pricing without thinking about the customer or the business that you want to build? It’s almost impossible to answer. But if you ask yourself, what kind of people – do we want to build a premium brand? Do we want to do this, do we want to do that, do we want to reach as many people as possible or just a small segment? And what’s authentic to – authentic, because some people say: oh, we want to build the super premium, premium business.
I want to be the Porsche of the SaaS category. Cool. You know, it’s the clothes you wear, what are the things you buy, what are the ways you interact with the world as a consumer? If somebody is super cheap and only buys at the cheapest stores, and only rides the bus and doesn’t spend any money on anything, but then wants to build a luxury brand, I have an issue with that, usually.
Steli: Because it’s not congruent with the life you live –
Hiten: They’re going to have to learn a lot of stuff to be able to do that, to change a lot of things. And it’s one of the hardest things to tell founders when they see this attractive thing. That they’re not –
Steli: These people are doing it right so I want to be like them. But you don’t realize, you’re not like these people so do something that fits you and who you are, and not – there’s many ways to be successful so why don’t you just find something that’s authentic to kind of your personality and your culture anyway?
Hiten: That’s right.
Steli: So I think that’s a super crucial one. And also, the separation between let’s look at fact and then separate –
Hiten: And then we can debate what to do.
Steli: And then we can debate what to do, what our interpretation of the facts are. Those are two separate things.
Hiten: These are facts, right?
Steli: Yes, I like that. Are those our– because we already hit the line.
Hiten: Yeah, we’re good.
Steli: I think that’s it. All right. Hey, if you guys liked this episode, you should check out the episode about freemium in SaaS. It was a more heated debate between Hiten and I on the pros and cons of freemium and free in SaaS. Check that episode out. And also, if you liked the podcast, please go to iTunes and give us a rating, good or bad, write us a review, good or bad. Feedback is the breakfast for champions and we love your feedback. That’s it from us.
Hiten: See ya.