You have invested all your time and energy in building the product. So now it seems like the most important thing is to be perfect before launching. And what about the price of your product or service? Most startups consider payment when it’s time to get the product out on the market, yet SaaS pricing is a long and demanding process. And if not determine in the right measure, all your hard work had been in vain.
SaaS Pricing – How much you can charge the customer?
Determining prices in software industries is a very tricky job. And it’s true that you have unlimited possibilities. And that doesn’t always advantage. Consequently, it’s challenging for every company, let alone startups. So, now you must find answers to many questions.
How to form a price? What parameters to consider when you’re the only ones on the market with such a product or service? How to assess the value of work invested in the product/service? In this article, you will find guidance to solve all these questions.
This article inspired by the interesting study about pricing published on GrowthHackers website. “The Ultimate SaaS Pricing Guide for Seed-Stage Companies” gives good tips and examples. The author of this guide is OpenView’s Kyle Poyar. It’s very detailed, and because of that, it will take you a lot of time to read. It’s ok if you have time. But if you don’t, we’ll give you guidelines in a shorter time. Here you will learn most significant data for determining prices.
The guide starts with one interesting information:
Public SaaS companies capture anywhere from $100 to $1.8M per year on average from their customers.
To form a good price in the market you should not rely solely on competition. This could have harmful consequences for your business. Innovation should not end with your product. Charging must rather be a part of your new approach. Research over 1000 SaaS companies revealed several problems in pricing determination. More than 400 of them were in the seed stage.
Statistics say that common mistakes in SaaS pricing are:
- SaaS Pricing at the end. Only best-in-class companies take pricing into consideration earlier. Others do it before product launching. That is the case with almost half of seed stage companies, too.
- CEO’s determines the cost. For 55% of seed stage companies pricing handled on an ad hoc basis. And no one else dedicated to pricing. Almost 82% of seed stage companies CEOs own pricing. In opposition to 70% of expansion stage and 48% of growth stage companies.
Without research and testing prices. Companies spend so much time on the testing product, but not and how much customers are willing to pay for it. More than 40% of seed stage companies have never tested or piloted their pricing. A similar number of them never conducted market research.
- Low starting cost. The statistics are very cruel in this case. About 54% of seed stage companies charge less than $5,000 per year for an average customer. Compared to only 30% of expansion and growth stage companies. There is 41% of them who take a value-based approach to pricing. One-third is just mimicking competitors. A quarter of them makes a decision relying on instincts. And a handful of 7% is taking a cost-plus approach.
The best thing when you are a startup is that you can fix everything, regardless of a bad start. You can set an appropriate price at any time. Of course, the sooner the better. You have more flexibility to rethink and experiment with fees.
“The Ultimate SaaS Pricing Guide for Seed-Stage Companies” introduced two thoughtful pricing approaches. Companies like x.ai and Meetup had great success. How they did it, you will learn in the following section.
What about charging by the user and freemium?
The results among public SaaS companies show that the fee per user is still dominant. Half of all pricing done this way. The question is why is that so?
First of all, we all heard about it. Customers know what they are paying for. It’s predictable to budget. It is thus not surprising that between 35-37% of the companies still use this metric. But is this a right billing method for your company? You need to find out now. Instead, you can try to incorporate usage into your SaaS pricing. So, let see if this is a better strategy.
What is the main advantage of a usage-based value metric?
It better reflects the unique value perceived by customers for your specific product. And tracks well with a land-and-expand business model. Therefore new customers can start at an affordable price. This is a good way to win them over. Let them realize they can no longer continue their life/work without your product or service. As their needs become more sophisticated they will pay more.
The video marketing platform for business, Wistia, has different pricing packages. Package price depends on the number of video clips that you post on their platform. Hence the price isn’t same for those who have several videos and those with much larger numbers. The number of clips increases customer expenses.
The same is with some product Zuora is offering. Monika Saha, Zuora’s VP of Marketing, explains:
“We chose to price based on transaction volume 8 years ago. At the time we got a lot of pushback from the target market. Buyers used to pay for accounting and CRM software on a per-user basis.”
Therefore, think twice whether per user pricing is the best value metric for you. Will it impede your growth prospects? In an early stage of your growth is tremendous flexibility. You can experiment with different pricing structures. So, your pricing model could be as innovating as your product offer. Probably, there’s a better alternative you’ve yet to discover.
What about freemium?
In the software, the world has become customary to get something for free. Possibly forever. But, can be quite risky to go out like this on the market, especially if you are a startup. SaaS startups are now under big pressure to generate paying customers. Free offer attracts too many people outside of target market. In most cases, they will never convert to paying customers. Free users can drain scarce resources. And that’s not good.
Pacific Crest, in 2015 annual survey, asked SaaS operators how much of their company’s new ACV is driven by freemium leads. Only 9% derived greater than one-quarter of their new ACV from freemium. Three-quarters did not generate any new ACV. SaaS entrepreneurs need to be more creative when generating leads and new business. Sometimes old-school tactics can help.
Four Approaches to Neutralize a Failing Freemium Model
- Free trials can showcase premium features. When the trial expires they’re disabled. This creates a much stronger incentive for the user to convert to paid customer. About 30% SaaS operators said free trial leads drove greater than one-half of their company’s new ACV.
- Tailored, hyper-specific free products can be great to attract your target buyers. Without cannibalizing their paid offerings. Such as Logo API, one of Clearbit’s free products. It makes one of their 85 data points available for free.
- Product qualified lead (PQL) engines. It means to sell entry-level versions of a product to individuals or teams within larger enterprises. As part of a land-and-expand business model.
- Anti-lean startup approach. Some companies reversed the playbook and becoming “anti-lean” startups. Companies like x.ai first monetize and then go out to the market. It took them almost three years to get to market, but buyers were eager to pay for their unique product.
The Meetup Example for Building Demand
The story about Meetup is the especially relevant example of how failure can lead to success. The most important are not to give up. Grab all the chances you can get!
What was their situation at the beginning?
“Meetup has been building local communities for thirteen years. The team here had experimented with a number of strategies. Including Meetup Everywhere, corporate Meetup sponsorships, and even branded perks and incentives, but nothing seemed to stick.”
says Brian Lafayette, Director of Strategy at Meetup.
First of all, they had one encourage fact. None of the companies that signed up for their modified subscription ever canceled. The catalyst for reengagement was a phone call from Google Developers Groups. They preference was to use Meetup to manage over 700 groups from all over the world. Seems like it was a turning point for Meetup.
The first thing was to come up with a detailed plan. And it gave specific guidance to their sales team. “The model also gave our sales team super-specific, month-by-month targets. It was easier for us to see exactly when they were falling short. So we could make proactive changes to improve conversion,” Lafayette explains.
They investigated what went wrong before. The problem was long-distance group management. If what you build doesn’t leverage your core product, you will quickly lose support. The project viewed as a distraction from the core business. Meetup’s core product had been about facilitating and mobilizing local groups. So, this served to upgrade product in Pro Meetup. Then they interviewed existing customers about possible features. Therefore they were asking what would be most interesting to them. How they were using Meetup for their existing groups. Also, they had the price discussion. Because it was important to understand the different price thresholds.
The first step was creating a landing page for a non-existing product. They needed to confirm whether they could sell the product at the target prices. So, Meetup’s teams took the offer to the market. They narrowed the focus to the audience willing and able to pay a premium for a better value. By creating a tiered SaaS pricing structure that addressed three customer types. Big for-profit businesses, small for-profit businesses, and nonprofits for startups.
The sales strategy entered the small changes that as a result gave great effects. It creates a much more efficient customer experience. They featured Meetup Pro in the help section. Began routing people who tried to add a fourth group directly to sales. Put in place simple sign-up form. Removed a comprehensive master service agreement. And also enabled credit card payments. “From there, it was just a matter of helping them see how easily they could upgrade to Pro. So they could manage their groups in a scalable way,” Lafayette says.
As a result, after a Pro product launch, the user base has grown to more than 200 organizations and 5,000 paying groups. In seven months time. The most amazing were the fact that product has 100% retention. They kept the original hacked solution ‘product’ as a kind of backup option. In addition, it was one of the keys to retention rate. Customers who don’t convert to the Pro version still have a product option on the platform.
In conclusion, we would like to announce the next part of this reblogging article about SaaS pricing. So, you will find out how you can do it successfully yourself. We’ll introduce you a simple framework for pricing your new product.