This article was originally published here on May 14, 2018.
One of the most powerful levers a SaaS company has in driving growth is its pricing model. Yet, few companies spend the time to get it right, often letting the market or their competitors set pricing for them. Here are 7 tips to break the mold and develop a more optimized pricing model.
1. Find Your Value Metric
According to a 2017 Pacific Crest Private SaaS Company Survey the most common pricing model SaaS businesses use today is per-user. It’s simple and straightforward, and most consumers and businesses accept it. However, it rarely matches value to price, meaning some customers will be overpaying for the value they’re deriving from the product while others will be underpaying. More often than not there is a better metric that measures true consumption. Here are a few examples:
- Evernote¹: Based on GBs of storage plus add-on features
- HubSpot²: Based on # of contacts you want to market to
- GitHub³: Based on # of repositories of code stored
- Wistia⁴: Based on # of videos you can store with them, plus integrations and priority support
There are two benefits to this approach. First, you don’t limit the number of people using the product. You encourage broad use of the product and, if it’s powerful, consumption (and pricing) will grow naturally. Second, you’re better able to compete at the low end (where consumption is low and therefore the price is low) and better able to capture value at the high end.
2. Never Offer a Discount Without Getting Something in Return
Price is just one component in a negotiation. Never just discount the price without getting something in return. If the prospect wants a lower price, tell them you can give it to them if they commit to an upfront payment, a two-year commitment, or being a reference. Not everything is important to them and they will often be willing to trade some terms in return for a lower price.
3. Keep Your Average Discount to Less Than 10%
In our extensive experience helping our portfolio companies purchase software, we have found enterprise software companies have historically discounted their price around 20-40%. They gave their reps a lot of freedom to get deals closed and assumed all reps were equal in their ability to negotiate. Some companies are bucking this trend and setting the expectation that they simply don’t discount, or don’t go beyond some relatively low ceiling, ~10%. This can have many benefits:
First, it removes rep variability. In all organizations, some reps are better than others at knowing when and how to discount. If you set up a culture where discounting is the norm, you’re going to have some reps that are discounting too much and too soon. You can manage through this by having complex approval workflows but that slows down the sales cycle.
Second, it builds trust. If you discount 40%, clients start to look at you like a used car salesman and think you’re trying to pull one over on them. They remember this and approach future interactions thinking they have to fight for everything. This is not a good place to start the relationship.
Third, it reinforces the value of the product. When you’re buying a product and the seller discounts the price 40% you start to wonder about the quality of the product.
Fourth, customers and prospects communicate more often today and will find out if you’re offering huge discounts. You are effectively resetting your price in the market in today’s connected world.
“If you find your team unable to sell without discounting at greater than 10%, 15%, or 20% then it may be time to confirm you have the right starting point for your pricing.”
4. Understand Your Customer’s P&L and How Your Price Fits Into It
Learn how your clients’ businesses work and make sure your pricing is informed by this. You should know how they make money, what their gross margins are, and what good unit economics look like to them. For example, if you sell your software to warehouse managers, you should know they have tight gross margins and there will be more pressure to have a pricing model that is linked to the additional revenue you’re going to help them generate or cost you will save them. If you sell software to healthcare sales reps, you should know the average sales rep salary in the industry and how your pricing compares. If you sell software to security departments in big banks, you should know security teams are relatively small but they’re securing a ton of assets, so price based on what they’re securing, not per user.
5. Know When to Say No
Not every deal is a good deal. Don’t change your pricing model to win a customer that’s not a good fit. Don’t discount outside of your guidelines to win. If someone doesn’t see the value, they will have a higher likelihood of churning. These poor fit customers can kill businesses. They cost the same to sell and support but they churn before you can make your money on them. Know when to say no!
6. Don’t Give Enterprise-wide Deals or Throw in Extra Products for Free
Companies often get overly excited to win the big deal with a Fortune 1000 company. While this can be a great moment in the company’s history, don’t go overboard by providing an enterprise license. The company would not be buying your software if they didn’t see value. They may use their muscle to push you into an enterprise wide license but resist the pressure. Don’t let them bully you. Same thing goes for throwing in ancillary products. Don’t throw in products that the customer isn’t willing to pay for today. If you do, you’re giving up future value to your company and getting very little credit for it.
7. Keep It Simple, Honest and Transparent
You don’t want to lose a deal – or slow it down – because the client couldn’t understand your pricing model or felt like you were trying to pull one over on them. Try to keep it simple enough that a person can figure it out in under 30 seconds and can estimate how much they need to buy in another 30 seconds. Using your pricing as an asset can help build good will. The company, Slack, identifies if your usage drops and lowers your price proactively. While this may mean less revenue for them in the short term, it builds good will and trust, which ultimately leads to more usage, less churn and more revenue in the long run. Compare that with other companies where you sign up for one month and accidentally get enrolled in a never ending monthly recurring bill. Once you find out, you never want to do business with that company again and will share that experience with others.
Spend the time and energy to get pricing right. The best companies realize this and use it to their advantage. Good luck!
The statements contained herein that are not historical facts are forward-looking statements. The forward-looking statements are based on current expectations, beliefs, assumptions, estimates, and projections about the industry and markets. Forward-looking statements contained herein are not guarantees of future performance and involve certain risks, uncertainties, and or forecasted in such forward-looking statements. Mainsail Partners is under no obligation, and does not intend, to update any forward-looking statements to reflect changes in the underlying assumptions or factors, new information, future events, or other changes. While the data contained herein has been prepared from information that Mainsail Management Company, LLC (“Mainsail”) believes to be reliable, Mainsail does not warrant the accuracy or completeness of such information.
¹“Get Started,” Evernote, accessed May 8, 2018. https://evernote.com/get-started
²“Pricing,” HubSpot, accessed May 8, 2018. https://www.hubspot.com/pricing/marketing
³“Pricing,” GitHub, accessed May 8, 2018. https://github.com/pricing
⁴“Pricing,” Wistia, accessed May 8, 2018. https://wistia.com/pricing
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