So, you're trying to figure out how to price your software-as-a-service (SaaS) product. Your mentor suggested you use a three-tiered pricing model, and your best friend said she read that prices ending in $0.99 signal value. But where to go from there?
In a recent CEO roundtable discussion, RocketSpace member and Tiltsta co-founder and CEO Bonny Morlak discussed the ins and outs of SaaS pricing and primed the room on enterprise sales. When he was the Chief Revenue Officer in a SaaS company, Morlak was in charge of enterprise sales and responsible for making pricing decisions. His insights proved to be invaluable.
"There's a big need for pricing education for startups," says Morlak. "With Lean Startup methodology, they test everything, but when it comes to pricing, they look at their competitors, create three tiers, then start really cheaply and hope for the best." Pricing, though, should also be tested, he argues.
Morlak provides an insightful eight-step process for testing and choosing a pricing strategy, no matter how big or small your SaaS company is. Here's what he recommends.
1. Talk With Potential Customers About Pain Points
"No one knows what the best price for your startup is, so you need to test it," Morlak starts. Reach out to potential customers and interview them about their current habits. Ask open-ended questions, take lots of notes and don't be fooled by politeness. "You'll walk into a boardroom full of very important-looking people. If no one has objections, they're not interested," he says.
Don't ask potential customers "How much would you pay for this?" he warns. Instead, ask interviewees about their pain points and "mentally involve your product as a 'pain killer' against those pain points," says Morlak. Interview these potential customers on how much "pain relief" your product could provide and what value they'd assign to that "pain relief."
Value, he says, isn't just about picking a price or monetary assignment. Understand if users would be saving time, labor expenses or other costs. "When you convert those savings over to money, suddenly you have a number, how much they'd be saving per year," Morlak adds.
2. Apply the 10x Rule
Once you understand how much a person would be saving per year by not having a particular problem, apply the 10x Rule, Morlak says. The 10x Rule states that a product or service provides 10x the value of its price to the consumer. So, if your interviewee said they'd be saving about $1,000 per year, and thus willing to pay something of that nature or less, you'd charge $100 per year. Likewise, if you're charging $100 annually, make sure your customers are experience about $1,000 of value per year.
3. Keep Your Target Customer in Mind With Every Decision
In your interviews, you'll likely click more strongly with some customers. "If you interview 100 people, pay attention to the 20 who really resonate strongly," says Morlak. "Life is short. You want to work with people who are a pleasure to work with. They're also the ones who are prepared to pay the most for your services. The hardest customers to deal with are often the ones who are willing to pay the least." Morlak says this small group will be a basis for your target market. Engage in persona mapping to define and even name your target user. Whether you're designing a landing page, naming a product or crafting a slogan, always consider how the target customer would receive it.
4. Test Pricing Variations
Once you've identified your target customers and understood their pain points and the value you'd bring to them, it's time to invite them to your beta product and test pricing. Morlak suggests testing different prices with different target customers.
5. Respond to Feedback
Note when there is pushback that a price is "too high" and decrease pricing 10 to 20 percent each time, until you find the sweet spot. You can always go lower, so be sure to start high. When you start low, you anchor the price and increasing it will be a huge battle with existing users, Morlak says.
6. Let Beta Customers Test the Full Product
To start, you should release the full product to beta testers. While a three-tiered pricing model is typical and suggested in SaaS pricing, you'll need to understand user behavior across the full product before limiting access to certain features. "Give beta testers everything and see where they find the most value," Morlak suggests. "You'll find that customers use 20 percent of your features 80 percent of the time. Make that your base plan." From there, a smaller subsets of users will use other features; use those to determine the other tiers of your pricing model.
7. Align Pricing and Payment Structure With Core Value Metrics
"Should you price per user, per project, per graphic, or something else?" Morlak asks rhetorically. "Your talks with your customers will give you their core value metric." Your product's price, he says, should center around that core value metric.
If your tool is only going to be used by two people in a large enterprise, he says, don't price it per user. Look into the number of project, spreadsheets or whatever else that the value proposition for the customer is based on.
8. Always Price on Value
Every company has a unique value proposition, the thing that makes their offering beneficial to customers and differentiated from competitors. A founder's job in pricing is to quantitatively evaluate that value. The purpose of a startup is not only to create value, but also to capture it. Thus, SaaS pricing should be based off of user value, not off of startup effort. Many founders are happy to look at the cost or effort of producing a good and add a margin on top to define the price. That would be a mistake, Morlak cautions. Customers are often willing to pay more than cost-plus pricing, or effort-based pricing, as Morlak likes to call it.
The Bottom Line
As founders do in every other aspect of their startups, they should use Lean Startup methodology to test pricing, Morlak says. "Start with a hypothesis, test it, learn from it, adjust and retest," he says.
To give an example, Morlak discusses how the company tried for a year to sell a SaaS product priced at $9,500 to a large enterprise client. He took over the account and after listening to the client, he learned that they'd be saving $2.8 million annually based on eliminating call center costs after product implementation. He used the 10x Rule and upped the price to $280,000 — he got the deal in four weeks. "Cheaper is not always better," he says. "You have to match their value."
His overall suggestion? "Don't leave money on the table," he advises. "Your product is awesome. Never forget that."
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