Science of Pricing
In SaaS, pricing is part your marketing, your sales, your system, your upgrades, your conversations, your growth, and your happiness within the business. In some ways, it is the business.
Your pricing model should be based on a scientific model of evidence based decisions, and the people that are going to give you the answers to those decisions are your customers. If you’re not talking to them, you’re not doing your job.
There are a number of techniques noted in the SaaS Pricing Strategy book that outline what questions to ask your customers to determine their:
- Willingness to pay
- Interest in different features
- Interest in different kinds of pricing models
As well as what price points create the most sales vs. the most revenue. The SaaS Pricing Strategy book does rely exclusively on the the economist Van Westendorp’s Price Sensitivity Meter, which is a great place to start. But there are also counter-arguments to this method, which I think are valid.
There are four questions from Van Westendorp’s Price Sensitivity meter:
- At what price would you consider the product to be so expensive it is not worth buying? (too expensive)
- At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/high)
- At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good (too cheap)
- At what price would you consider the product to be a bargain - a great buy for the money? (cheap/good value)
Rather than delving into how to ask these questions the right way, how to find the right price for your company, and why that price may or may not be right, it would be better if you just read the books I mentioned on SaaS pricing already. They do a great job of exploring this concept.
Especially if you’re sell at the enterprise level, I highly recommend one of my favorite short reads on value-based selling Breaking the Time Barrier, by Mike McDerment the founder and CEO of Freshbooks. He also happens to be a really nice guy who randomly took me out to lunch one day and schooled me hard on the differences between small business and enterprise accounting systems. But that’s another story.
What Breaking the Time Barrier delves into is the difference between value-based pricing vs. time-based pricing for agencies. If I was going to wrap the book up into a few words it would be “If you are selling something in a market where the price can be based on the value you provide for your customers or clients, base your pricing on this.” This is also what is recommended in the book noted at the start of this chapter, SaaS Pricing Strategy by Price Intelligently.
What this means is that you are providing value to your customers, so your price should reflect the value you provide. There are other ways to price, noted in both of those books, such as cost-plus pricing (take your cost and add a margin to it) and competitor-based pricing (figure out what your competitors are charging and charge something close). The point is, if you are providing something that is exactly the same as what someone else is providing, they are probably going to just go with the other company.
So figure out how you are different and set your price based on how much money you’re making or saving that client, not on how much it costs you or what your competition is doing.