A one-time only price setting effort is a no-go! Pricing is a dynamic process that must evolve and adapt to your growth. It should be, as this McKinsey Articlesuggests – an essential and frequently used tool in the toolbox of every SaaS company.
Elements like inflation, or a pandemic are alsos factors that will make you relook at your pricing strategy. According to the Harvard Business Review, the most effective pricing moves here on out, will be bold but tailored.
How does one approach pricing then?
Software Pricing Guru, Jan Pasternak (formerly with Microsoft, LinkedIn, Citrix & Coupang) tells you how; in this insightful piece originally published in author Ajit Ghuman’s book, Price To Scale.
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When it comes to general pricing methodology, I have observed that there are three stages that work best.
You must first start with a hypothesis around key value drivers, customer preferences and product packages.
[1] The Data Stage: You start by doing/undertaking competitive landscape research. You then understand what the customers need and want, and what they declare. Ask customers to volunteer information, and send them surveys. These can take different forms, such as the Van Westendorp analysis. In-person interviews can be conducted to qualitatively assess pain points and expectations.
All of this should help inform/revise your key hypothesis.
[2] The Testing Stage: The next phase is testing. You try to do A/B testing or take a similar approach. In some cases, it may not be possible to split the website into two! But then, you might try to test on two different cohorts of prospects, and offer them slightly different tiers, within different packages. Typically, in such cases, we see that what customers actually do during tests is directionally similar to the results of the research, surveys and studies — but the net impact can also be different. E.g., In one test, we expected a 50 per cent greater ‘take rate’ for a certain tier, but in practice or in testing, it was only 20 per cent greater, or then 70 per cent greater. The intensity can vary.
The round of testing usually leads you to polish the new offering. You validate the key value drivers you selected in the beginning, but now you understand better what the tiers should be. There could be two or maybe four, and you can also determine the cut-off points between the tiers in order to maximize revenue.
In testing, data simplicity matters. If you propose four tiers of a product, even if that means each prospect finds a solution better suited to their needs and consumption, the tiers can get confusing as they require analysis to choose. If you offer fewer tiers, even if they don’t fit the customer needs as well, you see a higher conversion rate. This is a bit counter-intuitive initially.
It is important to not test only on the customers who are already visiting your website. A common mistake is putting something on a website without a broader demand generation campaign — especially when it comes to discounts. If you’re only talking to pre-existing customers, and offer them the product they visited the website for, but cheaper? Of course, they will buy it!
But one cannot quite measure if you will be able to attract new customers who are not even considering the products. It could lead to false negatives and misplaced comfort.
It must be added that driving agreement across departments is necessary. If you are introducing discounts, finance will be terrified; sales will have mixed feelings — because on the one hand, they can sell something more easily, but on the other, they cannot meet quotas if the discount is too deep. The product team will probably be excited to connect to more users. Driving the agreement on what the success metric is, and ensuring that everybody is comfortable with that, is more difficult than doing the data work.
[3] The Controlled Launch Stage: Once you have iteratively tested changing the tiers and found the optimal line-up, you do a release that is very controlled and limited to a small portion of your prospects or customers. Even at the last stage, some corrections may be needed. You don’t want to do a big release after stage one or two — inch out to the market with incremental, restricted releases. This is why it is all quite a time - consuming and engaging process. But overall, it provides you with the best quality of results.
