In this article, we will present a simple framework for SaaS pricing model. This is a continuation of our previous post about Saas pricing model. Here you will discover the most important steps that can help you to set up the price. This is a very important task. If you don’t do this right, all your work was in vain. Therefore, learn how to place your product on the market with the right price.
SaaS Pricing model – Simple framework that can change things around
First of all, this article uses data from especially relevant “The Ultimate SaaS Pricing Guide for Seed Stage Companies”. Published on the website GrowthHackers. Their SaaS pricing framework will allow you to find the true value of your product. Don’t underestimate this step. Probably, your success in business will largely depend on it.
Since you are finishing product or service, you are probably feeling happy with all the work you and your team have done. Impatient to show it to the world? Think you finished everything? Seems like you specify your price. What is a dollar amount of your product? Do you have an answer? If you didn’t, there is yet one more question for you.
Before you set up SaaS pricing model
It’s crucial to understand that the price determination is, most of all, important for your success. Due to make things easier you can use several key data. So, the more information you have the better your price settings will be. Remember, no data point is a single source of truth. You must combine them all.
Here are four keys that opened the doors of success:
1. Industry benchmark,
2. Competitive analysis,
3. Economic value analysis,
4. Market research.
Starting point – Industry benchmark
First of all, you need to understand the market you are in. If you have competitors, get to know them well. The comparison will give a better market picture. What’s the price range that your clients expect to pay? How much can you expect to charge? Seems like, the ranges can be quite wide. Therefore, the key is to be set in the right place. What will be buyer’s cost depends on many factors. The level of the purchaser reached within the organization. Also, how many users interact with the product. And the breadth of the product offering.
In their guide, OpenView analyzed statements of 52 publicly traded SaaS companies. In the infographic below you can see SaaS prices they were realizing. For each of the companies, they collected several data.
- target segment(s),
- annual revenue,
- the number of paid customers,
- and annual average revenue per customer (ARPC).
At first glance, you can see that the largest number of companies targets large Enterprises. Most of all, they tend to have in hundreds of customers. Preferably from the Fortune 1000 list. Enterprise-focused companies go after a very thin slice of the market. But, they make up for it by commanding a median ARPC of $200,000.
Almost a quarter of companies target Midmarket buyers. It can mean that the company only goes after the Midmarket. Or that their customers are evenly distributed from very small to very large. While their ARPC ranges from a low of $5,300 to a high of $46,100.
Only 4 of 52 companies are SMB-focused. These companies, earn a median of $500 per year, of $40 per month from their customers. Maybe the solution for them is to chase a bigger market. They have a cost-efficient go-to-market model.
First midpoint – Competitive Analysis
Another thing for you to do is to find out your competitive landscape. To narrow price model range you should conduct the in-depth competitive analysis. For many startups, there is no direct competition. So, you have to watch companies you consider peers. How can you do this? There are numbers of ways:
- Gather information by online research.
- And, be sure to check out SaaS pricing model.
- Read their press interviews.
- Find software reviews services.
- Also, third party research reports can be useful.
- Plenty of information you can find on forums or database services.
- Finally, don’t forget to read financial statements.
All this will help you familiarize with the environment you are in.
Second midpoint – Economic Value Analysis
Most noteworthy, you need to answer a big question. How much economic value your product creates for customers? How much value do you think it creates? This typically consists of incremental revenue, reduced cost, reduced risk or time savings. For each, you can attach monetary value. Which pricing model you will choose depends on your target audience. The amount of captured economic value depends on your ability to prove a benefit. Also, how much that benefit matters to your target customer. And the consistency of financial value for customers. You will not be able to capture all. In conclusion, pay attention that what is essential for one, is not necessarily important to others.
Ending point – Market Research
Finally, you need to get specific buyer feedback on their needs, value, and willingness-to-pay. There are two available types of SaaS pricing model market research: qualitative and quantitative.
Most common qualitative research in B2B markets is one to one interviews. They are doable when you have a small universe of target customers. While chats last up to 30 minutes each, they can cover a wide range of topics. Interviews should be direct to the customer’s needs, not price. It would be rather better to talk about customers needs, not primarily about price.
The next stage is to apply the van Westendorp method. It’s a usual technique of testing. Interviewers are asking a series of open-ended questions. With the aim to find the right price for product or service. What is buyers “acceptable” price? When those it starts to get too “expensive”?
In our first article about SaaS pricing, we talk about Meetup company. If you remember, they applied qualitative SaaS pricing model techniques. It helps them to set the launch price for their new product, Meetup Pro. They talked with existing customers about possible features. What would be helpful to them? Also, how they were using the product for their existing groups. Finally, insights from this research led Meetup to a segmented pricing strategy. Because of that, they addressed companies willing to pay different sums. From large enterprises to startups and nonprofit organizations.
When you are targeting a larger number of potential customers quantitative research is your rather best choice. Because it provides you with statistically significant data. As a result, you can compare and contrast responses across different segments of participants.
First of all, keeps surveys on the shorter side, up to 15-20 minutes. This way you customize the risk of survey fatigue and poor quality data. Also, it will give you more opportunity to use indirect pricing methods. Such as conjoint analysis. You can show respondent’s sets of product configurations and price points. Furthermore, they can choose which they would be most likely to buy. Indirect research methods like conjoint are more reliable than qualitative methods. Allowing you to optimize pricing model and forecasting outcomes across a population. But, they need much more time, skill and expertise. Therefore, this is why rarely get applied in the start-up software world.
Having regular conversations? It allows you to have new data at your disposal. Use it to lower or raise pricing model from where you started. Even if you launched your product, you can fix it. The good news is you still have time to collect extra data and improve your SaaS pricing over time. You must constantly test the data and change the price by them.
How x.ai successfully applied anti leap SaaS pricing model approach?
First of all, their mission was to build an autonomous AI agent. Also, they needed about three years of intense R&D to apply anti-lean approach. The term that Dennis R. Mortensen, company’s CEO, use. To follow through, x.ai had to raise large funds to validate the idea and build the initial SaaS pricing model. For maintain efforts, they had to be sure to find customers eager to pay for the product.
The company launched three levels of pricing model. In charge of creating a pricing plan were Stefanie Syman and Brian Coulombe, VP of Customer Experience & Communications and Customer Acquisition Director.
As a result, this was their master plan:
Need to have a right mindset for the right price
Their mission was to democratize the personal assistant. What flows out from this is the need for a price that’s digestible to the professional individual. “We see x.ai as a core piece of the technology infrastructure. In the same way that email is a core piece of that infrastructure,” Syman underlined. In conclusion – it is necessary to everyone!
Seems like, x.ai is an essential tool for your work. Whether you’re a professional or someone who is entering the workforce. “Thinking about the problem with that mindset. Knowing and believing that we’re actually changing norms, leads you to quickly understand where you need to land on price in terms of scale,” Syman says. Finally, the team was ready to deal with the issue of SaaS pricing model.
It’s all in the details
So, they build their ideal customer. To the details. Who that was, job titles, company size, location and, also, pain points. But most importantly what it takes to get someone to pay for the Professional edition. x.ai gained exposure through organic word of mouth and a formal referral program. In this way, they reached the first group of beta users.
The company also enjoyed good press. They focused on the creation of a “schedule Nirvana” for customers. As a result, it led to beta user growth. “Growth has been driven by our existing customer base encouraging other folks in their network to sign up,” Coulombe explains.
Also, they had one more thing went in they favor. The product was easy to take across from beginner to professional level. Once the team starts using it, other departments and partners get wind of it. So, it was a good way to increase business.
Return On Investment
The key component of x.ai pricing strategy was to deliver value. No one gets a personal assistant anymore. Among company’s most advanced clients where people with the most scheduling-related pain. Their research reveals it. In addition, the mid-tier price point wasn’t a big deal for users. Because it delivers a huge value.
As a result, they made a simple calculation. Showing customers how much time the would save using their product. It was a clear demonstration of ROI in their marketing. Hence calculated the losing of ten hours per month only to scheduling meetings. Therefore, this was a clear sign for their users.
The team builds a long-term business vision. Trying to understand how different prices can relate to each other. “Our starting point was conveying that the core product utility is the same across all editions,” says Coulombe. Consequently, they start thinking about which users are interested in which features.
There is no perfect solution for SaaS pricing model
The team learned they could only use data to make the best possible decision. But, SaaS pricing model is always a work in progress. By examining their target market, x.ai team was able to build pricing structure that delivers an undeniable value. Both to the customers and the company. This is not the end of developing their strategy. Furthermore, they will use new data to improve it.
Hope this article was helpful to you. In conclusion, you get the idea that SaaS pricing model is demanding but necessary part of your work. If you want to succeed. You got guidance on how to do it. So, only need to apply it. It’s a piece of cake!
I’d like to hear your experiences and challenges with developing SaaS pricing model in the comments section below.