For starters, we need to emphasize Pricing a SaaS Startup over time.
You already live and breathe LEAN startup principles and determining your MVP. Minimum viable product. Then, testing, iterating, pivoting when needed, and repeating test and iteration.
When Pricing a SaaS startup, we need to think about it as we do product creation. We are constantly iterating our product, based on market feedback, customer usability feedback, analytics data, new feature requests, and so on. Products are an iteration, constantly evolving.
Why isn’t pricing?
Start to think about MVP with product and pricing.
We haven’t tended to think of pricing like minimum viable product. Rather, we make a decision on price …. and stick to it. This can be dangerous for your business.
Better, you establish a Maximum Viable Price, that is to say – collect as much data about what people are using within your platform, and iterate.
How do you first determine Maximum Viable Pricing?
There are a few steps you need to go through to set your first MVP, Maximum Viable Price.
When first starting out, you have a few options.
First, you can look at competitor pricing and try to determine their value versus your value (more on determining value below).
However, when there is no clear differentiator or understanding of what customers are willing to pay, you can test by offering different packages or different options (i.e. number of users or number of downloads), and maximize your revenue in the short term, particularly when needing revenue to scale.
Or, you can look at a market-grab approach, in which you lower your price relative to that of your competition, and slowly grow your price over time as you increase your customer size.
We came up with a few areas that are useful when determining price. Pricing is not a one-time event.
Here are things you should be tracking and iterating on over time.
Track what people are actually using over time. This sounds reasonable. Track what people are using. The value here is in understanding your actual customer behavior.
In Cheddar, we have something called Tracked Items. Cheddar was inherently built to allow you to track items and usage, making subscription billing more powerful with activity insights.
The best way to track usage is to create a system that allows you to easily test different pricing schemes with different customers, tracking activity that could roll up into your price.
An example of pricing a SaaS startup, Practice Panther did research and determined their Maximum Viable Price should be $49 / month / user. Their first iteration is competitively priced.
However, what they are doing differently, and what inevitably will give them an advantage over competition, is they are tracking real customer usage. They’ve set up “schemes” that allow them to think how they can price differently, based on real usage data.
An example of schemes in the case of Practice Panther might be –
Important to note is that it’s not just about changing price and maximizing revenue, but also maximizing value for our customers and helping them get the best use out of our product – versus asking them to pay for things they are not using.
Start by tracking a whole series of activities across your whole platform. Then think which activity should you be attaching that value to.
Oftentimes, we arbitrarily set our price, and we leave it — Indefinitely.
You need to be constantly looking at your numbers, your customer behavior, and always asking if the pricing model fits your customer and business needs.
The way you sell your product is the biggest component of cost to a software company. How much a customer is actually sending or receiving data, images, callbacks, etc to your servers can be one way that your hard costs are affected.
However, the vast majority of costs are tied to acquisition and sales costs.
Your CAC, or Customer Acquisition Cost, is made up of expenses to sell your product by acquiring more customers, including:
Customer acquisition costs change over time.
Starting out, you might be targeting selling the an individual at the bottom of an organization, casting a wide net, starting out at $9/month for example, or free.
Then at some point the hope is that you’ll see adoption across the whole organization, and you’ll want to pivot your pricing. Perhaps the next iteration is $99/month as you add staff to support the increase in customers.
Eventually, when moving upstream and selling to a whole company, no longer at the individual level, you’ll reach Enterprise sales. Enterprise sales is very different from general online marketing and sending paid ads to targeted audiences. It’s much more involved and requires phone calls, plane rides, in-person meetings, and longer sales cycles. Your Enterprise level pricing may now cost $5,000 per month.
Price goes up incrementally and carefully. A sample iteration might be:
But still, how is pricing determined?
A good rule of thumb for pricing SaaS companies is somewhere between 10% and 50% of costs savings.
Pricing needs to be clear and transparent and well-balanced to find the sweet spot between someone who is willing to pay for your product and isn’t willing to do the work themselves.
Let’s look at an example of a Telecom company.
Company XYZ comes in and analyzes your whole system. They determine your cost savings is $100k per year. They set their price at $50,000. There is clear and obvious value here. When ROI calculations are ambiguous, then customers will be willing to pay less.
Now how do we charge – is it $50,000 paid in increments of $4,200 monthly? Or is there a setup fee of $10,000 plus $3,300 monthly or quarterly payments of $10k? Do you charge per user?
When determining price, companies that have a product tied closely with their Value Metric will have the best chances of success when scaling their business model over time.
In the case of Telecom, perhaps they want to consider charging based on the number of seats plus the number of times communication is sent or received. Tying to their value metric, and not just a flat subscription model or user rate, will help them scale over time.
To reiterate from above, by tracking usage, we can determine the value of our product, based on real data and feedback loop from real customers.
Starting out, we might choose a flat subscription or per user fees, but it’s very important that we have our schemes set up to understand how our customers use our product.
Usage is how we determine value, then we figure out how to set pricing based on that value metric.
Once we determine how customers are really using our product, we can test various pricing to reflect that value.
We might choose to test this pricing over a year’s time, while we’re tracking usage data. Then we analyze that data to determine if our value lines up with usage.
Let’s recap. Pricing a SaaS startup is iterative. Like product development, we need to be constantly looking at pricing a saas startup over time, as your product and company needs grow and change.
The things that will influence that pricing include tracking usage and understanding your costs and your value. Start with a maximum valuable price, and constantly iterate.
Be transparent and clear about the ROI and iterate to find the sweet spot between what customers are willing to pay to not have to do it themselves. Align your product with a clear Value Metric so you can scale over time.